Share Name Share Symbol Market Type Share ISIN Share Description
Tesco Plc LSE:TSCO London Ordinary Share GB0008847096 ORD 5P
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  +2.60p +1.10% 239.10p 238.80p 239.20p 239.10p 235.60p 235.60p 423,260 08:06:01
Industry Sector Turnover (m) Profit (m) EPS - Basic PE Ratio Market Cap (m)
Food & Drug Retailers 63,911.0 1,674.0 13.7 17.5 23,356

Tesco PLC Preliminary Results 2016/17

12/04/2017 7:00am

UK Regulatory (RNS & others)


Tesco (LSE:TSCO)
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3 Years : From Sep 2016 to Sep 2019

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RNS Number : 2573C

Tesco PLC

12 April 2017

STRONG FOOD PERFORMANCE DRIVES SALES GROWTH

PROFIT RECOVERY CONTINUES - AHEAD OF EXPECTATIONS

 
On a continuing operations                  2016/17           2015/16    Change       Change 
 basis                                                                     at            at 
                                                                        constant       actual 
                                                                          rates        rates 
==================================  ===============  ================  ==========  ============= 
Headline measures(1) : 
    Group sales(2)                        GBP49.9bn         GBP47.9bn      1.1%          4.3% 
    Group operating profit before 
     exceptional items(3)                 GBP1,280m           GBP985m      24.9%        29.9% 
    Diluted EPS pre-exceptionals 
     & IAS19 finance costs                    7.90p             5.61p       n/a         40.8% 
    Retail operating cash flow(4)         GBP2,279m         GBP2,088m       n/a          9.1% 
    Net debt(4,5)                       GBP(3,729)m       GBP(5,110)m       n/a       down 27.0% 
Statutory measures: 
    Revenue                               GBP55.9bn         GBP53.9bn       0.8%         3.7% 
    Operating profit                      GBP1,017m         GBP1,072m     (11.8)%       (5.1)% 
    Profit before tax                       GBP145m           GBP202m     (39.1)%      (28.2)% 
    Diluted EPS                               0.81p             3.22p       n/a        (74.8)% 
 

Headlines

Growth in sales(2) , volume, profit(3) and cash(4)

   --      Group sales(2) up 4.3% to GBP49.9bn 

-- UK like-for-like sales(6) up 0.9% - first reported full-year growth since 2009/10; UK food LFL up 1.3%

   --      Positive volume growth in both UK & ROI and International 

-- Group operating profit before exceptional items(3) up 30% to GBP1,280m; UK & ROI up 60% to GBP803m

-- Step up in Group operating margin(3) from 1.8% to 2.3%; on track for 3.5-4.0% ambition by 2019/20

   --      Retail operating cash flow(4) up 9% to GBP2.3bn 
   --      Net debt(4,5) of GBP(3.7)bn, down 27%; GBP1.9bn of debt repaid within the year 

-- Statutory revenue up 3.7% to GBP55.9bn; PBT down year-on-year after GBP(235)m exceptional charge booked post year-end following our agreement with SFO and FCA(7)

Six strategic drivers guiding our actions

   --      Brand health(8) at strongest level in five years 

o Further improvement in core offer, including c.GBP300m investment in seven exclusive fresh food brands in March 2016, contributing to sustained market outperformance in fresh food

o Price of typical basket down 6% since Sept 2014; promotional participation down to 32%

o Most improved food retailer for quality perception; record rating for staff helpfulness at 80%

o Availability at record high; simpler range with 24% net reduction over two years

-- Cost savings of GBP226m already achieved towards GBP1.5bn medium-term target; FY savings of GBP455m

   --      Generated GBP2.3bn retail operating cash; GBP0.4bn underlying working capital(9) inflow 
   --      More efficient mix across channels & products; improved service model in 1,500 stores 

-- Released GBP0.5bn value(10) from property; 1.0m sq. ft. space re-purposed; 16 stores re-purchased

-- Innovated to remove 14bn calories from soft drinks in two years; food donations up 148% as FareShare FoodCloud now in all large UK stores; PayQwiq digital wallet used once every 5 seconds

Dave Lewis, Chief Executive:

"Today, our prices are lower, our range is simpler and our service and availability have never been better. Our exclusive fresh food brands have strengthened our value proposition and our food quality perception is at its highest level for five years. At the same time, we have increased profits, generated more cash and significantly reduced debt.

We are ahead of where we expected to be at this stage, having made good progress on all six of the strategic drivers we shared in October. We are confident that we can build on this strong performance in the year ahead, making further progress towards our medium-term ambitions.

On top of this, our proposed merger with Booker will bring together two complementary businesses, driving additional value for shareholders by realising substantial synergies and enabling us to access the faster growing 'out of home' food market."

Serving Britain's shoppers a little better every day

Like-for-like sales performance(6)

 
                     1Q         2Q         3Q         4Q         1H         2H         FY 
                   2016/17    2016/17    2016/17    2016/17    2016/17    2016/17    2016/17 
---------------  ---------  ---------  ---------  ---------  ---------  ---------  --------- 
 UK & ROI           0.3%       0.9%       1.7%       0.6%       0.6%       1.3%       0.9% 
---------------  ---------  ---------  ---------  ---------  ---------  ---------  --------- 
   UK               0.3%       0.9%       1.8%       0.7%       0.6%       1.2%       0.9% 
   ROI              0.3%       0.1%       0.5%      (1.3)%      0.2%      (0.4)%     (0.1)% 
---------------  ---------  ---------  ---------  ---------  ---------  ---------  --------- 
 International      3.0%       2.1%       0.6%      (0.3)%      2.6%       0.1%       1.3% 
---------------  ---------  ---------  ---------  ---------  ---------  ---------  --------- 
   Europe           2.8%       1.3%       0.7%      (0.8)%      2.0%      (0.1)%      0.9% 
   Asia             3.3%       3.0%       0.4%       0.5%       3.2%       0.4%       1.8% 
---------------  ---------  ---------  ---------  ---------  ---------  ---------  --------- 
 Group              0.9%       1.1%       1.5%       0.4%       1.0%       1.0%       1.0% 
---------------  ---------  ---------  ---------  ---------  ---------  ---------  --------- 
 

Headline Group results

A full Group income statement can be found on page 13 of this statement.

 
 52 weeks ended 25              2016/17           2015/16          Year-on-year        Year-on-year 
  February 2017                                                       change              change 
                                                                     (Constant            (Actual 
  On a continuing                                                    exchange            exchange 
  operations basis                                                    rates)              rates) 
----------------------------  -----------       -----------       -------------       ------------- 
 Group sales (exc. 
  VAT, exc. fuel)(2)           GBP49,867m        GBP47,859m            1.1%                4.3% 
----------------------------  -----------       -----------       -------------       ------------- 
 Fuel                          GBP6,050m         GBP6,074m            (1.0)%              (0.4)% 
----------------------------  -----------       -----------       -------------       ------------- 
 Revenue (exc. VAT, 
  inc. fuel)                   GBP55,917m        GBP53,933m            0.8%                3.7% 
----------------------------  -----------       -----------       -------------       ------------- 
 
 Group operating 
  profit before exceptional 
  items(3) 
   *    UK & ROI(11)            GBP1,280m          GBP985m             24.9%               29.9% 
                                 GBP803m           GBP503m             57.7%               59.6% 
                                 GBP320m           GBP320m            (12.5)%               0.0% 
   *    International            GBP157m           GBP162m             (3.1)%              (3.1)% 
 
 
   *    Tesco Bank 
----------------------------  -----------       -----------       -------------       ------------- 
 Include exceptional           GBP(263)m           GBP87m 
  items 
----------------------------  -----------       -----------       -------------       ------------- 
 Group operating 
  profit                       GBP1,017m         GBP1,072m           (11.8)%              (5.1)% 
----------------------------  -----------       -----------       -------------       ------------- 
 
 Group profit before 
  tax before exceptional 
  items and net pension 
  finance costs                 GBP842m           GBP490m                                 71.8% 
----------------------------  -----------       -----------                           ------------- 
 
 Group statutory 
  profit before tax             GBP145m           GBP202m                                (28.2)% 
----------------------------  -----------       -----------                           ------------- 
 
 Diluted EPS before 
  exceptional items              6.75p             4.05p 
----------------------------  -----------       ----------- 
 Diluted EPS before 
  exceptional items 
  and net pension 
  finance costs                  7.90p             5.61p 
----------------------------  -----------       ----------- 
 Diluted EPS                     0.81p             3.22p 
----------------------------  -----------       ----------- 
 Basic EPS                       0.81p             3.24p 
----------------------------  -----------       ----------- 
 
 Capex(12)                      GBP1.2bn          GBP1.0bn 
----------------------------  -----------       ----------- 
 Net debt(4,5)                 GBP(3.7)bn        GBP(5.1)bn 
----------------------------  -----------       ----------- 
 Cash generated from            GBP2.3bn          GBP2.1bn 
  retail operations(4) 
----------------------------  -----------       ----------- 
 

A detailed analysis of discontinued operations can be found in Note 7 on page 32.

Notes

1. The Group has defined and outlined the purpose of its alternative performance measures, including its headline measures, in the Glossary on page 52.

2. Group sales exclude VAT and fuel. Sales growth shown on a comparable days basis.

3. Excludes exceptional items by virtue of their size and nature in order to reflect management's view of the performance of the Group.

4. Net debt and retail operating cash flow exclude the impact of Tesco Bank, in order to provide further analysis of the retail cash flow statement.

5. Net debt includes both continuing and discontinued operations.

6. Like-for-like is a measure of growth in Group online sales and sales from stores that have been open for at least a year at constant foreign exchange rates.

7. SFO and FCA are acronyms for the Serious Fraud Office and the Financial Conduct Authority respectively.

8. As per YouGov BrandIndex, February 2017.

9. Working capital excluding the impact of exceptional items.

10. Value released from property relates to gross proceeds from property disposals in the year.

11. The elimination of intercompany transactions between continuing operations and the discontinued Turkey operation, as required by IFRS 5 and IFRS 10, has resulted in a reduction to the prior period UK & ROI operating profit of GBP(2)m.

12. Capex is shown excluding property buybacks.

Creating value for our key stakeholders

Guided by the six strategic drivers we shared in October 2016, we have made strong progress this year with our focus on creating long-term, sustainable value for our key stakeholders.

Customers

-- introduced seven new, exclusive fresh food brands, investing c.GBP300m, further removing reasons for customers to shop elsewhere; these brands now feature in 64% of customers' baskets

-- simpler, clearer and lower prices; multi-buy promotions reduced by a further 24% year-on-year; typical customer basket 6% cheaper than in September 2014

   --    simpler product range with 24% net range reduction and 4,400 new products over two years 

-- improvements across all key customer metrics; record sales-based availability of 96%, continue to be rated first by customers for speed of service and score for staff helpfulness up to 80%

-- product and packaging innovation helping customers reduce waste, e.g. new, individual-portion chicken packaging and new frozen fruit ranges

Colleagues

   --    83% of all colleagues recommend us as a 'great place to work', up from 81% last year 

-- significant improvement in colleagues recommending us as a 'great place to shop' vs last year (+7 NPS)

   --    more opportunities, with 4,000 colleague promotions; plan for 2,500 apprenticeships this year 
   --    two-thirds of colleagues believe their job has become simpler year-on-year 

-- moved replenishment from nights to days in 195 stores, increasing number of colleagues available to help customers at peak times

   --    first UK colleague health month in January 2017 including 1.8m pieces of free fruit provided 

Supplier partners

   --    Supplier Viewpoint measure improved from 70% to 77% this year (UK: from 68% to 78%) 

-- ranked as top overall retailer by the independently-run Advantage Report Mirror supplier survey

   --    Supplier Network re-launched and now has 5,000 members; 94% rate network as beneficial 
   --    launched food waste hotline in March 2017 to quickly address potential waste in supply chain 

-- 99.5% of small suppliers and 93% of largest suppliers moved to standardised payment terms; all to move by end-August 2017

Shareholders

-- in October 2016, shared ambition to deliver Group operating margin of 3.5-4.0% by 2019/20, underpinned by six strategic drivers including GBP1.5bn cost savings

-- generated GBP2.3bn retail operating cash flow, including underlying working capital inflow of GBP0.4bn

-- regained full ownership of another 16 UK stores, in line with aim to reduce exposure to fixed-uplift or inflation-linked rental agreements; further seven large stores re-purchased in April 2017

   --    completed sale of our business in Turkey, avoiding incremental cash investment 
   --    proposed merger with Booker to enable access to larger, faster-growing market opportunity 

-- intention to resume dividend payments in respect of the 2017/18 financial year; expected to grow progressively, with aim of achieving target cover of around two times EPS over the medium-term

Looking ahead

We made good progress over the last year, further strengthening our customer offer and delivering an improvement in profitability a little ahead of expectations.

We are confident in the plans we have shared and in the progress we will make this year, including further steps towards reducing our costs by GBP1.5bn, generating GBP9bn retail cash from operations and improving Group operating margin to between 3.5% and 4.0% by 2019/20. With a much more competitive offer and supplier partnerships as strong as they have ever been, we are much better positioned to navigate challenging market conditions.

In January, we announced that we had agreed the terms of a proposed merger with Booker, focused on unlocking new growth, particularly in the faster-growing 'out of home' food market. We are continuing to engage as planned with the Competition and Markets Authority in advance of seeking shareholder approval for the transaction, anticipated in late 2017/early 2018.

Financial Results

The results of Kipa, our business in Turkey, have been classified as discontinued operations in these results. We announced the sale of Kipa on 10 June 2016, with the transaction completing on 1 March 2017.

Sales:

 
 On a continuing operations     UK & ROI    International[1]     Tesco       Group 
  basis                                                           Bank 
----------------------------  -----------  -----------------  ----------  ----------- 
 Sales                         GBP37,692m      GBP11,163m      GBP1,012m   GBP49,867m 
  (exc. VAT, exc. fuel) 
----------------------------  -----------  -----------------  ----------  ----------- 
 change at constant 
  exchange rates(2) 
  %                               0.6%            2.1%           6.0%         1.1% 
 change at actual exchange 
  rates(2) %                      1.4%           15.2%           6.0%         4.3% 
----------------------------  -----------  -----------------  ----------  ----------- 
 Like-for-like sales 
  (exc. VAT, exc. fuel)           0.9%            1.3%             -          1.0% 
----------------------------  -----------  -----------------  ----------  ----------- 
 Statutory revenue             GBP43,524m      GBP11,381m      GBP1,012m   GBP55,917m 
  (exc. VAT, inc. fuel) 
 Includes: Fuel                GBP5,832m        GBP218m            -       GBP6,050m 
----------------------------  -----------  -----------------  ----------  ----------- 
 

1. International consists of Central Europe (Czech Republic, Hungary, Poland and Slovakia), Thailand and Malaysia.

2. Sales change shown on a comparable days basis; statutory Group sales change was 1.0% at constant exchange rates and 4.2% at actual exchange

rates.

Group sales grew by 1.1% at constant exchange rates with positive like-for-like growth in both the UK & ROI and International. At actual exchange rates, sales grew by 4.3% including a 3.2% foreign exchange translation benefit due to the weakness of Sterling. Further information on sales performance is included in Appendices 1 to 3 on page 61 of this statement.

In the UK and the Republic of Ireland (ROI), we have now seen five consecutive quarters of like-for-like sales growth.

In the UK, volumes grew 1.6% and transactions grew 1.7% as we continued to make fundamental improvements to all aspects of our offer. We saw annual positive like-for-like growth for the first time in seven years and outperformed the market across all categories on a volume basis. Volume outperformance was particularly strong in fresh food, where the exclusive brands we launched in March 2016 have helped to significantly strengthen our value proposition.

Significant product cost deflation in the first half of the year eased in the second half. In collaboration with our supplier partners, we have worked hard to minimise the impact of emerging inflationary cost pressures. Despite some inflation in a number of categories, the price of a typical customer basket remains around 6% cheaper than in September 2014 and promotional participation has fallen to 32% as we made a conscious decision to focus our investments on sustainable improvements rather than on short-term couponing and promotions. We achieved improvements in all key customer metrics, including colleague helpfulness and availability, where performance reached record levels.

In the Republic of Ireland, like-for-like sales fell by (0.1)% as we continued to invest in lowering prices. We have a leading position in the market in volume terms and have further grown volume share by making improvements across our customer offer, with a focus on fresh produce, meat and bakery.

International sales grew by 2.1% at constant exchange rates, including a 0.8% new store contribution driven by store openings in Thailand which more than offset the impact of store closures, primarily in Europe. International sales growth weakened in the second half due to an increasingly competitive environment in Europe, particularly Poland, and as we annualised a strong performance last year in Asia.

In the year, we grew like-for-like sales strongly in Thailand as we invested in both lowering prices and improving our fresh food proposition. We grew market share and were pleased to retain our number one position(1) for customers for brand and trust. In Malaysia, top-line sales growth was held back by weak consumer spending across the market and a trend away from large stores towards convenience shopping, where we are currently under-represented.

In Central Europe, like-for-like sales grew in all markets apart from Poland which remains intensely competitive. Positive volume growth in the region was driven by a strong performance in fresh food where we improved quality and inspired customers with new ranges and events.

Group statutory revenue of GBP55.9bn includes sales of fuel, which were stable year-on-year. Fuel retail price deflation had eased by the end of the first half, returning to significant retail price inflation by the end of the second half.

[1] According to BASIS Global Brand Image tracker, February 2017

Operating profit:

 
 On a continuing operations      UK &     International    Tesco      Group 
  basis                           ROI                       Bank 
-----------------------------  --------  --------------  --------  ---------- 
 Operating profit before        GBP803m      GBP320m      GBP157m   GBP1,280m 
  exceptional items 
-----------------------------  --------  --------------  --------  ---------- 
 change at constant exchange 
  rates %                        57.7%       (12.5)%      (3.1)%      24.9% 
 change at actual exchange 
  rates %                        59.6%        0.0%        (3.1)%      29.9% 
-----------------------------  --------  --------------  --------  ---------- 
 Operating profit margin 
  before exceptional items       1.84%        2.81%       15.51%      2.29% 
-----------------------------  --------  --------------  --------  ---------- 
 change at constant exchange     67bp        (46)bp       (145)bp     44bp 
  rates (basis points) 
 change at actual exchange       68bp        (42)bp       (145)bp     46bp 
  rates (basis points) 
 Operating profit               GBP519m      GBP421m      GBP77m    GBP1,017m 
-----------------------------  --------  --------------  --------  ---------- 
 

Group operating profit before exceptional items was GBP1,280m, up 24.9% on last year at constant exchange rates and up 29.9% at actual rates. Statutory operating profit of GBP1,017m includes the impact of exceptional items, which are described in more detail below and in Note 4 on page 28 of this statement.

Our full year UK & ROI operating profit before exceptional items was GBP803m, up 60% on last year, with margin growth of 68 basis points year-on-year. This improvement includes the impact of investments we have made in all aspects of our offer, particularly in lowering core prices and in the quality and price of the exclusive fresh food brands which we launched in March 2016. These investments enabled us to drive volume growth, generating positive operational leverage. In addition to managing costs more effectively year-on-year, we are also optimising the mix of our offer across channels and products. For example, within our beers, wines and spirits category we have focused on improving the relevance and profitability of our offer by broadening our range of speciality beers, increasing the prominence of own brand products and maintaining a strong, stable core price position in an extremely promotional market.

In a highly competitive environment, international operating profit before exceptional items was GBP320m, flat year-on-year at actual exchange rates and down by (12.5)% at constant exchange rates. Whilst we continued to invest in our offer in all of our markets, our response to intense competition in Poland weighed on profitability in Central Europe. We continued to focus on improving our store economics across the region, including simplifying management structures, reducing store administration and closing unprofitable store counters. We also opened a new distribution centre at Poznan in Poland, reducing transport costs for the country by 20%. From April 2017, we have separated the management of our international business, creating two new Executive Committee roles leading Asia and Central Europe, giving greater focus to each region.

The introduction of a new retail tax in Poland remains suspended pending the outcome of the European Commission's investigation. We continue to be cautious about potential legislative changes in our European markets.

Further information on operating profit performance is included in Note 2, starting on page 22 of this statement.

Exceptional items in operating profit:

 
                                           This        Last 
                                            year        year 
--------------------------------------  ----------  ---------- 
 Net impairment of non-current            GBP(6)m    GBP(423)m 
  assets and onerous lease provisions 
 Net restructuring and redundancy        GBP(199)m   GBP(126)m 
  costs 
 Provision for customer redress          GBP(45)m        - 
 Interchange settlement                   GBP57m         - 
 Property transactions                    GBP165m     GBP156m 
 Provision for SFO and FCA obligations   GBP(235)m       - 
 Past service credit and associated          -        GBP480m 
  costs arising on UK defined 
  benefit pension scheme closure 
 Total exceptional items in              GBP(263)m    GBP87m 
  operating profit 
--------------------------------------  ----------  ---------- 
 

Exceptional items are excluded from our headline performance measures by virtue of their size and nature, in order to reflect management's view of the performance of the Group. In the current year, the net effect of exceptional items on operating profit is GBP(263)m.

Our annual impairment testing resulted in a net charge of GBP(6)m. This comprises a net GBP103m provision release relating to property, a net increase of GBP(56)m in onerous lease provisions and a net GBP(53)m impairment charge in goodwill and intangible assets, principally relating to dunnhumby subsidiary, Sociomantic.

Net restructuring and redundancy charges of GBP(199)m relate principally to changes to our distribution network and store colleague structures and working practices in the UK & ROI, and also includes a GBP(35)m charge relating to Tesco Bank business simplification.

The provision for customer redress of GBP(45)m was recognised in Tesco Bank in the first half, following updated guidance published by the Financial Conduct Authority, proposing an extension to the Payment Protection Insurance settlement deadline which is now set at August 2019.

Exceptional items include a credit of GBP57m in relation to a legal settlement in respect of interchange fees.

We generated net profits (pre-tax) of GBP165m from property transactions in the year, of which GBP91m related to the sale of the Letnany Shopping Mall and Liberec Forum Shopping Centre in the Czech Republic. We also sold a number of properties and development sites in the UK & ROI business.

An exceptional charge of GBP(235)m has been recorded as an adjusting post balance sheet event, following judicial approval on 10 April 2017 of a Deferred Prosecution Agreement between Tesco Stores Limited and the UK Serious Fraud Office regarding historic accounting practices and an agreement with the UK Financial Conduct Authority of a finding of market abuse in relation to the Tesco PLC trading statement announced on 29 August 2014.

Further detail on all exceptional items can be found in Note 4 on page 28 of this statement.

Joint ventures and associates:

 
                            This year   Last year 
-------------------------  ----------  ---------- 
 Share of post-tax losses   GBP(30)m    GBP(21)m 
  from JVs and associates 
  before exceptional 
  items 
 Exceptional items: 
     Impairment in Gain     GBP(54)m        - 
      Land 
     Insurance reserve      GBP(23)m        - 
      adjustment 
-------------------------  ----------  ---------- 
 Share of post-tax losses   GBP(107)m   GBP(21)m 
  from JVs and associates 
-------------------------  ----------  ---------- 
 

Losses from joint ventures and associates before exceptional items increased by GBP(9)m to GBP(30)m, due to lower profits recognised in our UK property joint ventures. After exceptional items, including an impairment of investment property within Gain Land, our associate in China, and an adjustment in insurance reserves in Tesco Underwriting, our share of post-tax losses from joint ventures and associates rose to GBP(107)m from GBP(21)m last year.

Further detail can be found in Note 12, starting on page 39 of this statement.

Finance income and finance costs:

 
                              This year   Last year 
---------------------------  ----------  ---------- 
 Interest receivable           GBP48m      GBP29m 
  and similar income 
 IAS 32 and 39 'Financial      GBP61m         - 
  instruments' - fair 
  value remeasurements 
---------------------------  ----------  ---------- 
 Finance income                GBP109m     GBP29m 
---------------------------  ----------  ---------- 
 Interest payable             GBP(523)m   GBP(490)m 
 Capitalised interest           GBP6m       GBP6m 
 IAS 32 and 39 'Financial         -       GBP(19)m 
  instruments' - fair 
  value remeasurements 
 IAS 19 net pension finance   GBP(113)m   GBP(155)m 
  costs 
---------------------------  ----------  ---------- 
 Finance costs                GBP(630)m   GBP(658)m 
---------------------------  ----------  ---------- 
 Exceptional charge:          GBP(244)m   GBP(220)m 
  Translation of Korea 
  proceeds 
---------------------------  ----------  ---------- 
 Statutory finance costs      GBP(874)m   GBP(878)m 
---------------------------  ----------  ---------- 
 

Finance income rose to GBP109m, mainly due to the favourable effect of marking-to-market financial instruments. These are non-cash adjustments driven by changes in the market's assessment of credit and debt risk.

Interest payable increased to GBP(523)m due to debt acquired as part of our February 2016 agreement to regain sole ownership of 49 stores and two distribution centres. The impact of this was partially offset by a GBP26m reduction in interest following the repayment of debt in the year.

Net pension finance costs of GBP(113)m reduced in line with the reduction in the opening IAS 19 pension deficit at the start of the 2016/17 financial year. Net pension finance costs are calculated by multiplying the opening net deficit by the opening discount rate each year. For 2017/18, they are expected to increase to c.GBP(165)m.

An exceptional non-cash loss of GBP(244)m arose on the translation of the proceeds from the sale of our Homeplus business in Korea which were held in GBP money market funds in a non-Sterling denominated subsidiary. This does not represent any economic cost to the Group.

Further detail can be found in Note 5 on page 30 of this statement.

Group tax:

 
                        This year   Last year 
---------------------  ----------  ---------- 
 Tax on profit before   GBP(185)m    GBP(8)m 
  exceptional items 
---------------------  ----------  ---------- 
 Tax on profit          GBP(87)m     GBP54m 
---------------------  ----------  ---------- 
 

Tax on profit before exceptional items was GBP(185)m with an effective rate of tax for the Group of 25%. This tax rate is higher than the UK statutory rate primarily due to the impact of the 8% supplementary tax surcharge on bank profits, introduced in January 2016, and depreciation of assets that does not qualify for tax relief. The tax rate benefited from the impact on deferred tax of the expected reduction in the UK corporation tax rate from 18% to 17% in 2020.

On a statutory basis, including an exceptional credit of GBP98m principally relating to a lower book value than tax value of property disposals and tax relief on exceptional impairment and restructuring costs, the tax charge was GBP(87)m.

The effective tax rate on profit before exceptional items for the 2017/18 financial year is expected to be similar to this year, at around 25%.

Earnings per share:

 
 On a continuing operations    This    Last 
  basis                         year    year 
----------------------------  ------  ------ 
 Diluted earnings per 
  share before exceptional 
  items and net pension 
  finance costs                7.90p   5.61p 
 Diluted earnings per 
  share                        0.81p   3.22p 
 Basic earnings per share      0.81p   3.24p 
----------------------------  ------  ------ 
 

Diluted earnings per share before exceptional items and net pension finance costs were 7.90p, 41% higher year-on-year principally due to our stronger profit performance. Statutory basic earnings per share from continuing operations were 0.81p, lower than last year driven by higher net exceptional costs.

Summary of total indebtedness(1) :

 
                         This year      Last year      Movement 
---------------------  -------------  -------------  ------------ 
 Net debt (excludes     GBP(3,729)m    GBP(5,110)m     GBP1,381m 
  Tesco Bank) 
 Discounted operating   GBP(7,440)m    GBP(7,814)m      GBP374m 
  lease commitments 
 Pension deficit, IAS   GBP(5,504)m    GBP(2,612)m    GBP(2,892)m 
  19 basis (post-tax) 
---------------------  -------------  -------------  ------------ 
 Total indebtedness     GBP(16,673)m   GBP(15,536)m   GBP(1,137)m 
---------------------  -------------  -------------  ------------ 
 
   1.     Total indebtedness is defined in the glossary, starting on page 52 

Net debt (excluding Tesco Bank) reduced by GBP1.4bn to GBP(3.7)bn, as our retail operating cash flow and property and business disposal proceeds were greater than capital expenditure and other charges.

The reduction in discounted operating lease commitments includes a benefit from the buybacks we have completed in the UK. In the year, we regained sole ownership of 16 superstores from a number of different vendors, resulting in an annual rent saving of GBP22m.

The IAS 19 pension deficit measure, which relates to our closed UK defined benefit scheme, increased by GBP(2.9)bn to GBP(5.5)bn due to the reduction in bond yields. Despite this increase in the IAS 19 measure of our liabilities, the actual pension payments that are payable to members in the future have not changed.

During the year, we completed a de-risking programme which has reduced the future volatility of the scheme's long-term funding.

At the last triennial valuation, the Trustee and the Company agreed a long-term funding plan where the Company is paying contributions of GBP270m a year to the UK defined benefit scheme. The next triennial actuarial valuation is effective as at 31 March 2017 and work is already underway. The Trustee is aiming to conclude the valuation as soon as is reasonably possible. Further detail can be found in Note 17 on page 46 of this statement.

We have a strong funding and liquidity profile underpinned by GBP4.4bn committed facilities and our key credit metrics (fixed charge cover, net debt/EBITDA and total indebtedness ratio) have improved over the year.

Summary retail cash flow:

 
                                           This year     Last year 
---------------------------------------  ------------  ------------ 
 Cash flow from continuing operations      GBP1,695m     GBP2,033m 
  excluding working capital 
---------------------------------------  ------------  ------------ 
 (Increase)/decrease in working 
  capital 
 - underlying decrease in working           GBP387m       GBP377m 
  capital 
 - impact from exceptional items            GBP197m      GBP(91)m 
 - cash impact of new approach                 -         GBP(231)m 
  to supplier payments 
 Cash generated from operations            GBP2,279m     GBP2,088m 
  - continuing operations 
---------------------------------------  ------------  ------------ 
 Cash generated from operations             GBP(1)m       GBP493m 
  - discontinued operations 
---------------------------------------  ------------  ------------ 
 Cash generated from operations            GBP2,278m     GBP2,581m 
---------------------------------------  ------------  ------------ 
 Interest paid                             GBP(518)m     GBP(422)m 
 Corporation tax (paid)/received           GBP(64)m       GBP125m 
---------------------------------------  ------------  ------------ 
 Net cash generated from retail            GBP1,696m     GBP2,284m 
  operating activities 
---------------------------------------  ------------  ------------ 
 Cash capital expenditure                 GBP(1,328)m   GBP(1,004)m 
---------------------------------------  ------------  ------------ 
 Free cash flow                             GBP368m      GBP1,280m 
---------------------------------------  ------------  ------------ 
 Other investing activities                GBP1,620m      GBP543m 
 Net cash (used in)/from financing        GBP(1,342)m    GBP(854)m 
  activities and intra-Group 
  funding and intercompany transactions 
---------------------------------------  ------------  ------------ 
 Net increase in cash and cash              GBP646m       GBP969m 
  equivalents 
---------------------------------------  ------------  ------------ 
 Include/(exclude) cash movements          GBP1,114m     GBP4,219m 
  in debt items 
 Fair value and other non-cash             GBP(379)m    GBP(1,817)m 
  movements 
---------------------------------------  ------------  ------------ 
 Movement in net debt                      GBP1,381m     GBP3,371m 
---------------------------------------  ------------  ------------ 
 

On an underlying basis, working capital improved by GBP387m driven by growing sales volumes, initiatives to reduce stockholding and the timing effect of a fuel payment. The reported total reduction in working capital also includes the net impact of exceptional items.

Excluding working capital, we generated GBP1.7bn of cash from continuing retail operations. The decrease of GBP(0.3)bn on the previous year primarily reflects the payment of a Turnaround bonus to colleagues in cash rather than shares and higher net exceptional costs than last year.

Interest paid was GBP(96)m higher than last year due to the debt acquired as part of our February 2016 agreement to regain sole ownership of 49 stores and two distribution centres. The impact of this was partially offset by GBP1.2bn of debt we redeemed in September 2016 and a further GBP0.7bn of debt we redeemed in January 2017.

The cash tax outflow of GBP(64)m reflects payments by our international businesses which more than offset a refund of taxes already paid in the UK, as we continue to agree and close historic enquiries into tax returns.

Cash movements of GBP1.1bn in debt items primarily reflect the redemption of three medium-term notes on their maturity.

A reconciliation between the Retail and Group cash flow can be found in Note 2, starting on page 22.

Capital expenditure and space:

 
                                 Group                UK &         International        Tesco 
                                                       ROI                               Bank 
                       ------------------------  --------------  ----------------  -------------- 
                        This    Last      YOY     This    Last     This     Last    This    Last 
                         year    year    change    year    year    year     year     year    year 
---------------------  ------  ------  --------  ------  ------  -------  -------  ------  ------ 
 Capital expenditure 
  (GBPm)                1,180    970      210      731     676     403      254      46      40 
---------------------  ------  ------  --------  ------  ------  -------  -------  ------  ------ 
 Gross space added/ 
  (reduced) (m 
  sq ft)(1,2)            0.7     0.7       -       0.2     0.3     0.5      0.4      n/a     n/a 
---------------------  ------  ------  --------  ------  ------  -------  -------  ------  ------ 
 Net space added/ 
  (reduced) (m 
  sq ft)(1)             (2.2)   (1.0)    (1.2)    (1.7)   (0.8)   (0.5)    (0.2)     n/a     n/a 
---------------------  ------  ------  --------  ------  ------  -------  -------  ------  ------ 
 

1. Excluding franchise stores.

2. 'Gross space added' excludes repurposing/extensions.

Capital expenditure (excluding buybacks) of GBP1.2bn was GBP0.2bn higher than last year reflecting our planned increase in spend to refresh more than 200 stores in the UK and to accelerate the store opening programme in Thailand. We now expect Group capital expenditure to be around GBP1.25bn in 2017/18. This is around GBP250m below our original estimate, as we continue to focus on capital spend that delivers attractive returns and move more of our planned technology spend to cloud-based services.

The net reduction of (2.2)m square feet includes (1.7)m square feet related to the disposal of Dobbies garden centres with the balance being net closures of space. In Asia, we opened 114 stores, primarily in our convenience format in Thailand. In Europe, we closed 23 stores.

This year we repurposed 1.0m square feet across the Group, improving the ease and relevance of the shopping trip for customers. This included 0.5m square feet in Thailand repurposed for new and existing partners, including five new branches of Decathlon Sports, exclusive in the market to Tesco Lotus, and four new cinemas. In the UK, we repurposed 0.1m square feet in 14 stores, introducing brands such as Miss Selfridge, Wallis and Holland & Barrett.

Further details of current and forecast space can be found in Appendix 5 starting on page 63.

Property:

 
                                       This year                               Last year 
                        --------------------------------------  -------------------------------------- 
                           UK &      International     Group       UK &      International     Group 
                            ROI                                     ROI 
----------------------  ----------  --------------  ----------  ----------  --------------  ---------- 
 Property(1) - 
  fully owned 
 - Estimated market      GBP13.1bn     GBP6.7bn      GBP19.9bn   GBP13.3bn     GBP6.4bn      GBP19.7bn 
  value 
 - NBV(2)                GBP12.6bn     GBP5.1bn      GBP17.8bn   GBP12.6bn     GBP5.0bn      GBP17.6bn 
 % net selling 
  space owned               52%           74%           63%         52%           71%           61% 
 % total property 
  owned - by value(3)       50%           78%           57%         47%           75%           54% 
----------------------  ----------  --------------  ----------  ----------  --------------  ---------- 
 

1. Stores, malls, investment property, offices, distribution centres, fixtures and fittings and work-in-progress. Excludes joint ventures.

2. Property, plant and equipment excluding vehicles.

3. Excludes fixtures and fittings.

The estimated market value of our fully owned property has increased by GBP0.2bn to GBP19.9bn, retaining a surplus of GBP2.1bn over the net book value, as the repurchase of 16 stores in the UK and a foreign exchange translation effect more than offset the impact of the sale of Turkey and Dobbies garden centres.

Our Group freehold property ownership percentage, by value, has increased from 54% to 57% year-on-year, driven by both the UK & ROI and International. In International, the effect of the sale of our business in Turkey more than offset the impact of the sale of two large freehold shopping centres in the Czech Republic on the mix of freehold to leasehold.

In April 2017, we regained ownership of a further seven large stores in the UK with a freehold valuation of GBP219m in a transaction with British Land. Including the effect of this transaction, we have now increased our proportion of freehold ownership by value in the UK & ROI to 51%, up by 10% over two years. The repurchase of stores to date has resulted in an annualised saving of GBP152m rent, predominantly in relation to fixed-uplift and index-linked rental agreements.

The Group operating lease charge reduced by 9% in the year to GBP1.0bn. We continue to seek opportunities to further reduce our exposure to index-linked and fixed-uplift rent inflation where the economics are attractive.

Tesco Bank:

 
                         This year   Last year   YOY change 
----------------------  ----------  ----------  ----------- 
 Revenue                 GBP1,012m    GBP955m       6.0% 
----------------------  ----------  ----------  ----------- 
 Operating profit 
  before exceptional 
  items                   GBP157m     GBP162m      (3.1)% 
----------------------  ----------  ----------  ----------- 
 Operating profit         GBP77m      GBP161m     (52.2)% 
 Lending to customers    GBP9,961m   GBP8,542m     16.6% 
 Customer deposits       GBP8,463m   GBP7,397m     14.4% 
 Net interest margin       4.0%        4.2%        (0.2)% 
 Risk asset ratio          20.0%       20.0%         - 
----------------------  ----------  ----------  ----------- 
 

Tesco Bank continues to provide a simple and transparent product offer to serve the banking and insurance needs of Tesco customers. Active customer account numbers grew by 3.5%, with particularly strong growth in current accounts. We have continued to improve our customer offer by introducing a new premium credit card, simplifying the loan application process by introducing digital signatures, giving interest-rate guarantees on current accounts for new and existing customers and through a national roll-out of PayQwiq to all large stores, a digital wallet app that allows customers to pay with their phone in our shops.

Operating profit before exceptional items reduced by (3.1)% to GBP157m. This decline was due to the full year effect of the introduction of European Commission caps on interchange income which first came into effect in December 2015. Adjusting for this impact, we saw strong profit growth driven primarily by lending income. Exceptional items of GBP(80)m relating to Tesco Bank are detailed in Note 4 on page 28 and include an increase in the provision for customer redress and a restructuring charge.

Risk-weighted assets have risen in line with lending and the Core Tier 1 ratio has improved to 16.7%. The balance sheet remains strong and well-positioned to support future lending growth from both a liquidity and capital perspective.

An income statement for Tesco Bank can be found in Appendix 6 on page 66 of this statement. Balance sheet and cash flow detail for Tesco Bank can be found within Note 2 starting on page 22 of this statement. Tesco Bank's full year results are also published today and are available at www.corporate.tescobank.com

Contacts

 
 Investor Relations:    Chris Griffith          01707 912 900 
 Media:                 Ed Young                01707 918 701 
  Philip Gawith, Teneo 
   Blue Rubicon                                 0207 420 3143 
 

This document is available at www.tescoplc.com/prelims2017.

A meeting for investors and analysts will be held today at 9.00am at London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS. Access will be by invitation only. For those unable to attend, there will be a live webcast available on our website at www.tescoplc.com/prelims2017. This will include all Q&A and will also be available for playback after the event. All presentation materials, including a transcript, will be made available on our website.

A video featuring Dave Lewis, Chief Executive, Jason Tarry, Chief Product Officer and Alessandra Bellini, Chief Customer Officer, discussing the Preliminary Results and our fresh food offer is available now to download in video, audio and transcript form at www.tescoplc.com/prelims2017.

Disclaimer

This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and operating margins, market trends and our product pipeline are forward-looking statements. Phrases such as "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. Any forward-looking statement is based on information available to Tesco as of the date of the statement. All written or oral forward-looking statements attributable to Tesco are qualified by this caution. Tesco does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances.

Group income statement

 
                                                      52 weeks ended                       52 weeks ended 
                                                      25 February 2017                     27 February 2016 
-----------------------------------  -----  -----------------------------------  ----------------------------------- 
                                                  Before  Exceptional     Total        Before  Exceptional     Total 
                                             exceptional        items      GBPm   exceptional        items      GBPm 
                                                   items        (Note                   items        (Note 
                                                    GBPm           4)                    GBPm           4) 
                                     Notes                       GBPm                                 GBPm 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Continuing operations 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Revenue                                2          55,917            -    55,917        53,933            -    53,933 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Cost of sales                                   (52,899)        (116)  (53,015)      (51,124)           35  (51,089) 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Gross profit/(loss)                                3,018        (116)     2,902         2,809           35     2,844 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Administrative expenses                          (1,734)        (261)   (1,995)       (1,836)           22   (1,814) 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Profits/(losses) arising 
 on property-related items                           (4)          114       110            12           30        42 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Operating profit/(loss)                            1,280        (263)     1,017           985           87     1,072 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Share of post-tax profits/(losses) 
 of joint ventures and 
 associates                           12            (30)         (77)     (107)          (21)            -      (21) 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Finance income                         5             109            -       109            29            -        29 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Finance costs                          5           (630)        (244)     (874)         (658)        (220)     (878) 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Profit/(loss) before 
 tax                                                 729        (584)       145           335        (133)       202 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Taxation                               6           (185)           98      (87)           (8)           62        54 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Profit/(loss) for the 
 year from continuing 
 operations                                          544        (486)        58           327         (71)       256 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Discontinued operations 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Profit/(loss) for the 
 year from discontinued 
 operations                            7            (37)         (75)     (112)            26        (153)     (127) 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Profit/(loss) for the 
 year                                                507        (561)      (54)           353        (224)       129 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
 
Attributable to: 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Owners of the parent                                 515        (555)      (40)           359        (221)       138 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Non-controlling interests                            (8)          (6)      (14)           (6)          (3)       (9) 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
                                                     507        (561)      (54)           353        (224)       129 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
 
Earnings/(losses) per 
 share from continuing 
 and discontinued operations 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Basic                                  9           6.32p                (0.49)p         4.42p                  1.70p 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Diluted                                9           6.31p                (0.49)p         4.40p                  1.69p 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
 
 
Earnings/(losses) per 
 share from continuing 
 operations 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Basic                                  9           6.76p                  0.81p         4.06p                  3.24p 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
Diluted                                9           6.75p                  0.81p         4.05p                  3.22p 
-----------------------------------  -----  ------------  -----------  --------  ------------  -----------  -------- 
 
 

The notes on pages 20 to 51 form part of this condensed consolidated financial information.

Group statement of comprehensive income/(loss)

 
                                                        52 weeks  52 weeks 
                                                            2017      2016 
                                                 Notes      GBPm      GBPm 
-----------------------------------------------  -----  --------  -------- 
Items that will not be reclassified to 
 income statement 
-----------------------------------------------  -----  --------  -------- 
Remeasurements on defined benefit pension 
 schemes                                          17     (3,567)     1,164 
-----------------------------------------------  -----  --------  -------- 
Tax on items that will not be reclassified                   579     (300) 
-----------------------------------------------  -----  --------  -------- 
                                                         (2,988)       864 
-----------------------------------------------  -----  --------  -------- 
Items that may subsequently be reclassified 
 to income statement 
-----------------------------------------------  -----  --------  -------- 
Change in fair value of available-for-sale 
 financial assets and investments                             80         5 
-----------------------------------------------  -----  --------  -------- 
Currency translation differences: 
-----------------------------------------------  -----  --------  -------- 
  Retranslation of net assets of overseas 
   subsidiaries, joint ventures and associates               764       168 
-----------------------------------------------  -----  --------  -------- 
  Movements in foreign exchange reserve 
   and net investment hedging on 
   subsidiary disposed, reclassified and 
   reported in the Group income statement                      -      (88) 
-----------------------------------------------  -----  --------  -------- 
Gains/(losses) on cash flow hedges: 
-----------------------------------------------  -----  --------  -------- 
  Net fair value gains/(losses)                              385       318 
-----------------------------------------------  -----  --------  -------- 
  Reclassified and reported in the Group 
   income statement                                        (384)     (292) 
-----------------------------------------------  -----  --------  -------- 
  Change in hedge relationship                                 -       186 
-----------------------------------------------  -----  --------  -------- 
Tax on items that may be reclassified                       (23)      (30) 
-----------------------------------------------  -----  --------  -------- 
                                                             822       267 
-----------------------------------------------  -----  --------  -------- 
Total other comprehensive income/(loss) 
 for the year                                            (2,166)     1,131 
-----------------------------------------------  -----  --------  -------- 
Profit/(loss) for the year                                  (54)       129 
-----------------------------------------------  -----  --------  -------- 
Total comprehensive income/(loss) for 
 the year                                                (2,220)     1,260 
-----------------------------------------------  -----  --------  -------- 
 
Attributable to: 
-----------------------------------------------  -----  --------  -------- 
Owners of the parent                                     (2,206)     1,270 
-----------------------------------------------  -----  --------  -------- 
Non-controlling interests                                   (14)      (10) 
-----------------------------------------------  -----  --------  -------- 
Total comprehensive income/(loss) for 
 the year                                                (2,220)     1,260 
-----------------------------------------------  -----  --------  -------- 
 
Total comprehensive income/(loss) attributable 
 to owners of the parent arises from: 
-----------------------------------------------  -----  --------  -------- 
Continuing operations                                    (2,096)     1,485 
-----------------------------------------------  -----  --------  -------- 
Discontinued operations                                    (110)     (215) 
-----------------------------------------------  -----  --------  -------- 
                                                         (2,206)     1,270 
-----------------------------------------------  -----  --------  -------- 
 

The notes on pages 20 to 51 form part of this condensed consolidated financial information.

Group balance sheet

 
                                                 25 February 
                                                        2017  27 February 
                                          Notes         GBPm    2016 GBPm 
----------------------------------------  -----  -----------  ----------- 
Non-current assets 
----------------------------------------  -----  -----------  ----------- 
Goodwill, software and other intangible 
 assets                                    10          2,717        2,874 
----------------------------------------  -----  -----------  ----------- 
Property, plant and equipment              11         18,108       17,900 
----------------------------------------  -----  -----------  ----------- 
Investment property                                       64           78 
----------------------------------------  -----  -----------  ----------- 
Investments in joint ventures and 
 associates                                12            739          785 
----------------------------------------  -----  -----------  ----------- 
Other investments                                        823        1,078 
----------------------------------------  -----  -----------  ----------- 
Trade and other receivables                              180          201 
----------------------------------------  -----  -----------  ----------- 
Loans and advances to customers                        5,795        4,723 
----------------------------------------  -----  -----------  ----------- 
Derivative financial instruments                       1,303        1,532 
----------------------------------------  -----  -----------  ----------- 
Deferred tax assets                                      707           49 
----------------------------------------  -----  -----------  ----------- 
                                                      30,436       29,220 
----------------------------------------  -----  -----------  ----------- 
Current assets 
----------------------------------------  -----  -----------  ----------- 
Other investments                                        284           57 
----------------------------------------  -----  -----------  ----------- 
Inventories                                            2,301        2,430 
----------------------------------------  -----  -----------  ----------- 
Trade and other receivables                            1,475        1,406 
----------------------------------------  -----  -----------  ----------- 
Loans and advances to customers                        4,166        3,819 
----------------------------------------  -----  -----------  ----------- 
Derivative financial instruments                         286          176 
----------------------------------------  -----  -----------  ----------- 
Current tax assets                                        13           15 
----------------------------------------  -----  -----------  ----------- 
Short-term investments                     13          2,727        3,463 
----------------------------------------  -----  -----------  ----------- 
Cash and cash equivalents                  13          3,821        3,082 
----------------------------------------  -----  -----------  ----------- 
                                                      15,073       14,448 
----------------------------------------  -----  -----------  ----------- 
Assets of the disposal group and 
 non-current assets classified as 
 held for sale                              7            344          236 
----------------------------------------  -----  -----------  ----------- 
                                                      15,417       14,684 
----------------------------------------  -----  -----------  ----------- 
Current liabilities 
----------------------------------------  -----  -----------  ----------- 
Trade and other payables                             (8,875)      (8,293) 
----------------------------------------  -----  -----------  ----------- 
Borrowings                                 15        (2,560)      (2,826) 
----------------------------------------  -----  -----------  ----------- 
Derivative financial instruments 
 and other liabilities                                  (61)         (62) 
----------------------------------------  -----  -----------  ----------- 
Customer deposits and deposits from 
 banks                                               (6,687)      (5,906) 
----------------------------------------  -----  -----------  ----------- 
Current tax liabilities                                (613)        (419) 
----------------------------------------  -----  -----------  ----------- 
Provisions                                 16          (438)        (360) 
----------------------------------------  -----  -----------  ----------- 
                                                    (19,234)     (17,866) 
----------------------------------------  -----  -----------  ----------- 
Liabilities of the disposal group 
 classified as held for sale                7          (171)            - 
----------------------------------------  -----  -----------  ----------- 
Net current liabilities                              (3,988)      (3,182) 
----------------------------------------  -----  -----------  ----------- 
Non-current liabilities 
----------------------------------------  -----  -----------  ----------- 
Trade and other payables                               (324)        (275) 
----------------------------------------  -----  -----------  ----------- 
Borrowings                                 15        (9,433)     (10,711) 
----------------------------------------  -----  -----------  ----------- 
Derivative financial instruments 
 and other liabilities                                 (607)        (889) 
----------------------------------------  -----  -----------  ----------- 
Customer deposits and deposits from 
 banks                                               (2,276)      (1,573) 
----------------------------------------  -----  -----------  ----------- 
Post-employment benefit obligations        17        (6,621)      (3,175) 
----------------------------------------  -----  -----------  ----------- 
Deferred tax liabilities                                (88)        (135) 
----------------------------------------  -----  -----------  ----------- 
Provisions                                 16          (685)        (664) 
----------------------------------------  -----  -----------  ----------- 
                                                    (20,034)     (17,422) 
----------------------------------------  -----  -----------  ----------- 
Net assets                                             6,414        8,616 
----------------------------------------  -----  -----------  ----------- 
Equity 
----------------------------------------  -----  -----------  ----------- 
Share capital                                            409          407 
----------------------------------------  -----  -----------  ----------- 
Share premium                                          5,096        5,095 
----------------------------------------  -----  -----------  ----------- 
All other reserves                                       601        (141) 
----------------------------------------  -----  -----------  ----------- 
Retained earnings                                        332        3,265 
----------------------------------------  -----  -----------  ----------- 
Equity attributable to owners of 
 the parent                                            6,438        8,626 
----------------------------------------  -----  -----------  ----------- 
Non-controlling interests                               (24)         (10) 
----------------------------------------  -----  -----------  ----------- 
Total equity                                           6,414        8,616 
----------------------------------------  -----  -----------  ----------- 
 

The notes on pages 20 to 51 form part of this condensed consolidated financial information.

Group statement of changes in equity

 
                                                         All other reserves 
                                       ------------------------------------------------------ 
                                                     Capital                                                             Non- 
                       Share    Share      Other  redemption   Hedging  Translation  Treasury  Retained           controlling    Total 
                     capital  premium   reserves     reserve   reserve      reserve    shares  earnings    Total    interests   equity 
                        GBPm     GBPm       GBPm        GBPm      GBPm         GBPm      GBPm      GBPm     GBPm         GBPm     GBPm 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
At 27 February 
 2016                    407    5,095         40          16       211        (401)       (7)     3,265    8,626         (10)    8,616 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Profit/(loss) 
 for the year              -        -          -           -         -            -         -      (40)     (40)         (14)     (54) 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Other comprehensive 
 income/(loss) 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Change in fair 
 value of 
 available-for-sale 
 financial assets 
 and investments           -        -          -           -         -            -         -        80       80            -       80 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Currency 
 translation 
 differences               -        -          -           -         -          764         -         -      764            -      764 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Remeasurements 
 of defined benefit 
 pension schemes           -        -          -           -         -            -         -   (3,567)  (3,567)            -  (3,567) 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Gains/(losses) 
 on cash flow 
 hedges                    -        -          -           -         1            -         -         -        1            -        1 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Tax relating 
 to components 
 of other 
 comprehensive 
 income                    -        -          -           -         5         (13)         -       564      556            -      556 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Total other 
 comprehensive 
 income/(loss)             -        -          -           -         6          751         -   (2,923)  (2,166)            -  (2,166) 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Total comprehensive 
 income/(loss)             -        -          -           -         6          751         -   (2,963)  (2,206)         (14)  (2,220) 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Transactions 
 with owners 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Purchase of 
 treasury shares           -        -          -           -         -            -      (24)         -     (24)            -     (24) 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Share-based 
 payments                  -        -          -           -         -            -         9        28       37            -       37 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Issue of shares            2        1          -           -         -            -         -         -        3            -        3 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Dividends                  -        -          -           -         -            -         -         -        -            -        - 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Tax on items 
 charged to equity         -        -          -           -         -            -         -         2        2            -        2 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
Total transactions 
 with owners               2        1          -           -         -            -      (15)        30       18            -       18 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
At 25 February 
 2017                    409    5,096         40          16       217          350      (22)       332    6,438         (24)    6,414 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  -------  -----------  ------- 
 

The notes on pages 20 to 51 form part of this condensed consolidated financial information.

 
                                                         All other reserves 
                                       ------------------------------------------------------ 
                                                     Capital                                                            Non- 
                       Share    Share      Other  redemption   Hedging  Translation  Treasury  Retained          controlling    Total 
                     capital  premium   reserves     reserve   reserve      reserve    shares  earnings   Total    interests   equity 
                        GBPm     GBPm       GBPm        GBPm      GBPm         GBPm      GBPm      GBPm    GBPm         GBPm     GBPm 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
At 28 February 
 2015                    406    5,094         40          16        35        (488)      (17)     1,985   7,071            -    7,071 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Profit/(loss) 
 for the year              -        -          -           -         -            -         -       138     138          (9)      129 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Other comprehensive 
 income/ (loss) 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Change in fair 
 value of 
 available-for-sale 
 financial assets 
 and investments           -        -          -           -         -            -         -         5       5            -        5 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Currency 
 translation 
 differences               -        -          -           -         -           81         -         -      81          (1)       80 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Remeasurements 
 of defined benefit 
 pension schemes           -        -          -           -         -            -         -     1,164   1,164            -    1,164 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Gains/(losses) 
 on cash flow 
 hedges                    -        -          -           -       212            -         -         -     212            -      212 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Tax relating 
 to components 
 of other 
 comprehensive 
 income                    -        -          -           -      (36)            6         -     (300)   (330)            -    (330) 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Total other 
 comprehensive 
 income/(loss)             -        -          -           -       176           87         -       869   1,132          (1)    1,131 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Total comprehensive 
 income/(loss)             -        -          -           -       176           87         -     1,007   1,270         (10)    1,260 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Transactions 
 with owners 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Purchase of 
 treasury shares           -        -          -           -         -            -       (5)         -     (5)            -      (5) 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Share-based 
 payments                  -        -          -           -         -            -        15       273     288            -      288 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Issue of shares            1        1          -           -         -            -         -         -       2            -        2 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Dividends                  -        -          -           -         -            -         -         -       -            -        - 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
Total transactions 
 with owners               1        1          -           -         -            -        10       273     285            -      285 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
At 27 February 
 2016                    407    5,095         40          16       211        (401)       (7)     3,265   8,626         (10)    8,616 
-------------------  -------  -------  ---------  ----------  --------  -----------  --------  --------  ------  -----------  ------- 
 

The notes on pages 20 to 51 form part of this condensed consolidated financial information.

Group cash flow statement

 
                                                      Notes  52 weeks  52 weeks 
                                                                 2017      2016 
                                                                 GBPm      GBPm 
----------------------------------------------------  -----  --------  -------- 
Cash flows generated from/(used in) operating 
 activities 
----------------------------------------------------  -----  --------  -------- 
Operating profit/(loss) of continuing operations                1,017     1,072 
----------------------------------------------------  -----  --------  -------- 
Operating profit/(loss) of discontinued 
 operations                                                     (117)       102 
----------------------------------------------------  -----  --------  -------- 
Depreciation and amortisation                                   1,304     1,334 
----------------------------------------------------  -----  --------  -------- 
(Profit)/loss arising on sale of property, 
 plant and equipment and intangible assets                       (78)       164 
----------------------------------------------------  -----  --------  -------- 
(Profit)/loss arising on sale of subsidiaries 
 and other investments                                              3         - 
----------------------------------------------------  -----  --------  -------- 
(Profit)/loss arising on sale of joint ventures 
 and associates                                                   (5)       (1) 
----------------------------------------------------  -----  --------  -------- 
Impairment loss on goodwill                                        46        18 
----------------------------------------------------  -----  --------  -------- 
Net impairment loss/(reversal) on other 
 investments                                                     (12)       (7) 
----------------------------------------------------  -----  --------  -------- 
Net impairment loss/(reversal) on loans/investments 
 in joint ventures and associates                                   -         1 
----------------------------------------------------  -----  --------  -------- 
Net impairment loss/(reversal) on property, 
 plant and equipment, intangible assets and 
 investment property                                              (5)       182 
----------------------------------------------------  -----  --------  -------- 
Adjustment for non-cash element of pensions 
 charge                                                17           7     (395) 
----------------------------------------------------  -----  --------  -------- 
Additional contribution into pension schemes           17       (248)     (223) 
----------------------------------------------------  -----  --------  -------- 
Share-based payments                                               15       283 
----------------------------------------------------  -----  --------  -------- 
Tesco Bank fair value movements included 
 in operating profit                                               98        72 
----------------------------------------------------  -----  --------  -------- 
Retail (increase)/decrease in inventories                         124       251 
----------------------------------------------------  -----  --------  -------- 
Retail (increase)/decrease in development 
 stock                                                             16        99 
----------------------------------------------------  -----  --------  -------- 
Retail (increase)/decrease in trade and 
 other receivables                                               (74)        20 
----------------------------------------------------  -----  --------  -------- 
Retail increase/(decrease) in trade and 
 other payables                                                   510       260 
----------------------------------------------------  -----  --------  -------- 
Retail increase/(decrease) in provisions                           11     (280) 
----------------------------------------------------  -----  --------  -------- 
Tesco Bank (increase)/decrease in loans 
 and advances to customers                                    (1,529)     (868) 
----------------------------------------------------  -----  --------  -------- 
Tesco Bank (increase)/decrease in trade 
 and other receivables                                           (24)      (78) 
----------------------------------------------------  -----  --------  -------- 
Tesco Bank increase/(decrease) in customer 
 and bank deposits, trade and other payables                    1,474       463 
----------------------------------------------------  -----  --------  -------- 
Tesco Bank increase/(decrease) in provisions                       25      (35) 
----------------------------------------------------  -----  --------  -------- 
(Increase)/decrease in working capital                            533     (168) 
----------------------------------------------------  -----  --------  -------- 
Cash generated from/(used in) operations                        2,558     2,434 
----------------------------------------------------  -----  --------  -------- 
Interest received/(paid)                                        (522)     (426) 
----------------------------------------------------  -----  --------  -------- 
Corporation tax received/(paid)                                  (47)       118 
----------------------------------------------------  -----  --------  -------- 
Net cash generated from/(used in) operating 
 activities                                                     1,989     2,126 
----------------------------------------------------  -----  --------  -------- 
 

The notes on pages 20 to 51 form part of this condensed consolidated financial information.

 
                                                        52 weeks  52weeks 
                                                            2017     2016 
                                                 Notes      GBPm     GBPm 
-----------------------------------------------  -----  --------  ------- 
Net cash generated from/(used in) operating 
 activities                                                1,989    2,126 
-----------------------------------------------  -----  --------  ------- 
Cash flows generated from/(used in) investing 
 activities 
-----------------------------------------------  -----  --------  ------- 
Purchase of property, plant and equipment, 
 investment property and non-current assets 
 classified as held for sale                             (1,205)    (871) 
-----------------------------------------------  -----  --------  ------- 
Purchase of intangible assets                              (169)    (167) 
-----------------------------------------------  -----  --------  ------- 
Disposal of subsidiaries, net of cash disposed    19         205    3,237 
-----------------------------------------------  -----  --------  ------- 
Acquisition of subsidiaries, net of cash 
 acquired                                         19        (25)    (325) 
-----------------------------------------------  -----  --------  ------- 
Proceeds from sale of joint ventures and 
 associates                                                    -      192 
-----------------------------------------------  -----  --------  ------- 
Proceeds from sale of property, plant and 
 equipment, investment property, intangible 
 assets and non-current assets classified 
 as held for sale                                            512      350 
-----------------------------------------------  -----  --------  ------- 
Net (increase)/decrease in loans to joint 
 ventures and associates                                      15      (1) 
-----------------------------------------------  -----  --------  ------- 
Investments in joint ventures and associates                   -     (77) 
-----------------------------------------------  -----  --------  ------- 
Net (investments in)/proceeds from sale of 
 short-term investments                                      736  (2,894) 
-----------------------------------------------  -----  --------  ------- 
Net (investments in)/proceeds from sale of 
 other investments                                           141    (103) 
-----------------------------------------------  -----  --------  ------- 
Dividends received from joint ventures and 
 associates                                                   28       41 
-----------------------------------------------  -----  --------  ------- 
Interest received/(paid)                                      41        3 
-----------------------------------------------  -----  --------  ------- 
Net cash generated from/(used in) investing 
 activities                                                  279    (615) 
-----------------------------------------------  -----  --------  ------- 
Cash flows generated from/(used in) financing 
 activities 
-----------------------------------------------  -----  --------  ------- 
Proceeds from issue of ordinary share capital                  1        1 
-----------------------------------------------  -----  --------  ------- 
Increase in borrowings                                       185      586 
-----------------------------------------------  -----  --------  ------- 
Repayment of borrowings                                  (2,036)  (1,328) 
-----------------------------------------------  -----  --------  ------- 
Net cash flows from derivative financial 
 instruments                                                 475      154 
-----------------------------------------------  -----  --------  ------- 
Repayments of obligations under finance leases              (12)     (17) 
-----------------------------------------------  -----  --------  ------- 
Dividends paid to equity owners                    8           -        - 
-----------------------------------------------  -----  --------  ------- 
Net cash generated from/(used in) financing 
 activities                                              (1,387)    (604) 
-----------------------------------------------  -----  --------  ------- 
Net increase/(decrease) in cash and cash 
 equivalents                                                 881      907 
-----------------------------------------------  -----  --------  ------- 
Cash and cash equivalents at beginning of 
 the year                                                  3,082    2,174 
-----------------------------------------------  -----  --------  ------- 
Effect of foreign exchange rate changes                    (131)        1 
-----------------------------------------------  -----  --------  ------- 
Cash and cash equivalents including cash 
 held in disposal group at the end of the 
 year                                                      3,832    3,082 
-----------------------------------------------  -----  --------  ------- 
Cash held in disposal group                        7        (11)        - 
-----------------------------------------------  -----  --------  ------- 
Cash and cash equivalents at the end of the 
 year                                             13       3,821    3,082 
-----------------------------------------------  -----  --------  ------- 
 

The notes on pages 20 to 51 form part of this condensed consolidated financial information.

Note 1 Basis of preparation

This preliminary consolidated financial information has been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Conduct Authority, and the principles of International Financial Reporting Standards (IFRS) as adopted by the European Union. The accounting policies applied are consistent with those described in the Annual Report and Group Financial Statements 2017. The preliminary consolidated financial information has been prepared on a going concern basis. This preliminary consolidated financial information does not constitute statutory consolidated financial statements for the 52 weeks ended 25 February 2017 as defined under section 434 of the Companies Act 2006.

The Annual Report and Group Financial Statements for the 52 weeks ended 25 February 2017 were approved by the Board of Directors on 11 April 2017. The report of the auditor on those Group Financial Statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006. An abbreviated copy of the audit report can be found on page 56. The Annual Report and Group Financial Statements for 2017 will be filed with the Registrar in due course.

The Annual Report and Group Financial Statements for the 52 weeks ended 27 February 2016 were approved by the Board of Directors on 12 April 2016 and have been filed with the Registrar of Companies. The report of the auditor on those Group Financial Statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

The Directors consider that the Group has, at the time of approving the Group financial statements, adequate resources to continue in operational existence for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the preliminary consolidated financial information.

Discontinued operations

In accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', the net results of discontinued operations are presented separately in the Group income statement (and the comparatives restated) and the assets and liabilities of these operations are presented separately in the Group balance sheet. Refer to Note 7 for further details.

Standards issued but not yet effective

As of the date of authorisation of these financial statements, the following standards were in issue but not yet effective. The Group has not applied these standards in the preparation of the financial statements, and has not adopted any new or amended standards early:

-- IFRS 9 'Financial instruments' replaces IAS 39 'Financial instruments: Recognition and Measurement' with the exception of macro hedge accounting. The standard is effective for accounting periods beginning on or after 1 January 2018. The standard covers three elements:

- Classification and measurement. Changes to a more principle based approach to classify financial assets as either held at amortised cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss, dependent on the business model and cash flow characteristics of the financial asset.

- Impairment. Moves to an impairment model based on expected credit losses based on a three stage approach.

- Hedge accounting. The IFRS 9 hedge accounting requirements are designed to allow hedge accounting to be more closely aligned with the Group's underlying risk management. A new IASB project is in progress to develop an approach to better reflect dynamic risk management in entities' financial statements.

The Group expects to continue applying the existing hedge accounting requirements of IAS 39 for its portfolio hedge accounting until this new approach is implemented.

The Group intends to quantify the potential impact of IFRS 9 once it is practicable to provide reliable estimates, which will be no later than in the Annual Report and Financial Statements for the year ended 24 February 2018. IFRS 9 is expected to result in a more significant impact for Tesco Bank than for the Retail business.

-- IFRS 15, 'Revenues from Contracts with Customers' is effective for periods beginning on or after 1 January 2018. IFRS 15 introduces a five-step approach to the timing of revenue recognition based on performance obligations in customer contracts.

The Group recognises revenue from the following principal activities:

   -       Retailing and associated activities; and 
   -       Retail banking and insurance services through Tesco Bank. 

An assessment of the impact of IFRS 15 has been completed. Revenue recognition under IFRS 15 is expected to be consistent with current practice for the Group's revenue, with the exception of Clubcard loyalty points, certain telecommunication contracts and certain bespoke contracts fulfilled by dunnhumby, where the timing of revenue recognition will change. Had the principles of IFRS 15 been applied in the current reporting period, it would not have had a significant impact on the financial statements.

-- IFRS 16 'Leases' is effective for annual periods beginning on or after 1 January 2019 subject to EU endorsement. IFRS 16 provides a single lessee accounting model, requiring lessees to recognise right of use assets and lease liabilities for all applicable leases.

IFRS 16 is expected to have a significant impact on the amounts recognised in the Group's consolidated financial statements. On adoption of IFRS 16 the Group will recognise within the balance sheet a right of use asset and lease liability for all applicable leases. Within the income statement, rent expense will be replaced by depreciation and interest expense. This will result in a decrease in cost of sales and an increase in finance costs. The standard will also impact a number of statutory measures such as operating profit and cash generated from operations, and alternative performance measures used by the Group.

The full impact of IFRS 16 is currently under review, including understanding the practical application of the principles of the standard. It is therefore not practical to provide a reasonable estimate of the financial effect until this review is complete.

Alternative performance measures (APMs)

In the reporting of financial information, the Directors have adopted various APMs, previously termed 'Non-GAAP measures', of historical or future financial performance, position or cash flows other than those defined or specified under International Financial Reporting Standards (IFRS).

These measures are not defined by IFRS and therefore may not be directly comparable with other companies' APMs, including those in the Group's industry.

APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements.

Purpose

The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the Group.

APMs are also used to enhance the comparability of information between reporting periods and geographical units (such as like-for-like sales), by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid the user in understanding the Group's performance.

Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive setting purposes and have remained consistent with prior year.

The key APMs that the Group has focused on this year are as follows:

-- Group sales (previously termed Revenue exc. fuel): This is the headline measure of revenue for the Group. It excludes the impact of sales made at petrol filling stations due to the significant volatility of fuel prices. This volatility is outside the control of management and can mask underlying changes in performance.

-- Like-for-like sales: This is a widely used indicator of a retailer's current trading performance. It is a measure of growth in Group online sales and sales from stores that have been open for at least a year (but excludes prior year sales of stores closed during the year) at constant foreign exchange rates.

-- Operating profit before exceptional items: This is the headline measure of the Group's performance, and is based on operating profit before the impact of exceptional items. Exceptional items relate to certain costs or incomes that derive from events or transactions that fall within the normal activities of the Group but which, individually or, if of a similar type, in aggregate, are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group.

-- Retail operating cash flow: This is the operating cash flow of continuing operations, excluding the effects of Tesco Bank's cash flows.

-- Net debt: This excludes the net debt of Tesco Bank but includes that of the discontinued operations to reflect the net debt obligations of the Retail business.

-- Diluted earnings per share from continuing operations before exceptional items and net pension finance costs: This relates to profit after tax before exceptional items from continuing operations, and net pension finance costs attributable to owners of the parent divided by the weighted average number of ordinary shares in issue during the financial period adjusted for the effects of potentially dilutive options.

Some of our IFRS measures are translated at constant exchange rates. Constant exchange rates are the average actual periodic exchange rates for the previous financial year and are used to eliminate the effects of exchange rate fluctuations in assessing performance. Actual exchange rates are the average actual periodic exchange rates for that financial year.

Refer to the Glossary (page 52) for a full list and comprehensive descriptions and purpose of the Group's APMs.

Note 2 Segmental reporting

The Group's operating segments are determined based on the Group's internal reporting to the Chief Operating Decision Maker (CODM). The CODM has been determined to be the Group Chief Executive, with support from the Executive Committee, as the function primarily responsible for the allocation of resources to segments and assessment of performance of the segments.

The principal activities of the Group are therefore presented in the following segments:

   --      Retailing and associated activities (Retail) in: 
   -      UK & ROI - the United Kingdom and Republic of Ireland; and 
   -      International - Czech Republic, Hungary, Poland, Slovakia, Malaysia and Thailand; and 
   --      Retail banking and insurance services through Tesco Bank in the UK (Tesco Bank). 

This presentation reflects how the Group's operating performance is reviewed internally by management.

Excluded from the current year segmental information below are the retailing and associated activities of Turkey which have been classified as discontinued operations. Turkey's performance in the comparative year has been excluded from segmental information. Refer to Note 7 for further detail.

The CODM uses operating profit before exceptional items, as reviewed at monthly Executive Committee meetings, as the key measure of the segments' results as it reflects the segments' underlying performance for the financial period under evaluation. Operating profit before exceptional items is a consistent measure within the Group as defined within Note 1. Refer to Note 4 for exceptional items. Inter-segment revenue between the operating segments is not material.

Income statement

The segment results and the reconciliation of the segment measures to the respective statutory items included in the Group income statement are as follows:

 
52 weeks ended 25 February                                        Total                   Total 
 2017                          UK &                 Tesco   at constant     Foreign   at actual 
 At constant exchange           ROI  International   Bank      exchange    exchange    exchange 
 rates                         GBPm           GBPm   GBPm          GBPm        GBPm        GBPm 
---------------------------  ------  -------------  -----  ------------  ----------  ---------- 
Continuing operations 
---------------------------  ------  -------------  -----  ------------  ----------  ---------- 
Group sales                  37,424          9,892  1,012        48,328       1,539      49,867 
---------------------------  ------  -------------  -----  ------------  ----------  ---------- 
Revenue                      43,248         10,084  1,012        54,344       1,573      55,917 
---------------------------  ------  -------------  -----  ------------  ----------  ---------- 
Operating profit before 
 exceptional items(*)           793            280    157         1,230          50       1,280 
---------------------------  ------  -------------  -----  ------------  ----------  ---------- 
Exceptional items             (291)             87   (80)         (284)          21       (263) 
---------------------------  ------  -------------  -----  ------------  ----------  ---------- 
Operating profit/(loss)         502            367     77           946          71       1,017 
---------------------------  ------  -------------  -----  ------------  ----------  ---------- 
Operating margin               1.8%           2.8%  15.5%          2.3%           -        2.3% 
---------------------------  ------  -------------  -----  ------------  ----------  ---------- 
 
 
                                                                                    Total 
                                                                        Tesco   at actual 
52 weeks ended 25 February 2017                UK & ROI  International   Bank    exchange 
 At actual exchange rates                          GBPm           GBPm   GBPm        GBPm 
---------------------------------------------  --------  -------------  -----  ---------- 
Continuing operations 
---------------------------------------------  --------  -------------  -----  ---------- 
Group sales                                      37,692         11,163  1,012      49,867 
---------------------------------------------  --------  -------------  -----  ---------- 
Revenue                                          43,524         11,381  1,012      55,917 
---------------------------------------------  --------  -------------  -----  ---------- 
Operating profit before exceptional items(*)        803            320    157       1,280 
---------------------------------------------  --------  -------------  -----  ---------- 
Exceptional items                                 (284)            101   (80)       (263) 
---------------------------------------------  --------  -------------  -----  ---------- 
Operating profit/(loss)                             519            421     77       1,017 
---------------------------------------------  --------  -------------  -----  ---------- 
Operating margin                                   1.8%           2.8%  15.5%        2.3% 
---------------------------------------------  --------  -------------  -----  ---------- 
Share of post-tax profits/(losses) of joint 
 ventures and associates                                                            (107) 
---------------------------------------------  --------  -------------  -----  ---------- 
Finance income                                                                        109 
---------------------------------------------  --------  -------------  -----  ---------- 
Finance costs                                                                       (874) 
---------------------------------------------  --------  -------------  -----  ---------- 
Profit/(loss) before tax                                                              145 
---------------------------------------------  --------  -------------  -----  ---------- 
 

(*) Intercompany recharges totalling GBP2m (2016: GBP2m) between continuing operations and the Turkey discontinued operations have been eliminated.

 
                                                                          Total 
         52 weeks ended 27 February                           Tesco   at actual 
                               2016  UK & ROI  International   Bank    exchange 
           At actual exchange rates      GBPm           GBPm   GBPm        GBPm 
-----------------------------------  --------  -------------  -----  ---------- 
Continuing operations 
-----------------------------------  --------  -------------  -----  ---------- 
Group sales                            37,189          9,715    955      47,859 
-----------------------------------  --------  -------------  -----  ---------- 
Revenue                                43,080          9,898    955      53,933 
-----------------------------------  --------  -------------  -----  ---------- 
Operating profit before 
 exceptional items(*)                     503            320    162         985 
-----------------------------------  --------  -------------  -----  ---------- 
Exceptional items                          94            (6)    (1)          87 
-----------------------------------  --------  -------------  -----  ---------- 
Operating profit/(loss)                   597            314    161       1,072 
-----------------------------------  --------  -------------  -----  ---------- 
Operating margin                         1.2%           3.2%  17.0%        1.8% 
-----------------------------------  --------  -------------  -----  ---------- 
Share of post-tax profits/(losses) 
 of joint ventures and associates                                          (21) 
-----------------------------------  --------  -------------  -----  ---------- 
Finance income                                                               29 
-----------------------------------  --------  -------------  -----  ---------- 
Finance costs                                                             (878) 
-----------------------------------  --------  -------------  -----  ---------- 
Profit/(loss) before tax                                                    202 
-----------------------------------  --------  -------------  -----  ---------- 
 

(*) Refer to previous table for footnote.

Balance sheet

The following tables showing segment assets and liabilities exclude those balances that make up net debt (cash and cash equivalents, short-term investments, joint venture loans and other receivables, bank and other borrowings, finance lease payables, derivative financial instruments and net debt of the disposal group). Net debt balances have been included within the unallocated segment to reflect how the Group manages these balances. Intercompany transactions have been eliminated other than intercompany transactions with Tesco Bank in net debt.

 
                                                              Tesco 
                                   UK & ROI  International     Bank  Unallocated    Total 
At 25 February 2017                    GBPm           GBPm     GBPm         GBPm     GBPm 
--------------------------------   --------  -------------  -------  -----------  ------- 
Goodwill, software and 
 other intangible assets              1,293            322    1,102            -    2,717 
---------------------------------  --------  -------------  -------  -----------  ------- 
Property, plant and equipment 
 and investment property             12,893          5,206       73            -   18,172 
---------------------------------  --------  -------------  -------  -----------  ------- 
Investments in joint 
 ventures and associates                 11            657       71            -      739 
---------------------------------  --------  -------------  -------  -----------  ------- 
Non-current other investments             -              -      810           13      823 
---------------------------------  --------  -------------  -------  -----------  ------- 
Non-current trade and 
 other receivables(a)                    23             20        -            -       43 
---------------------------------  --------  -------------  -------  -----------  ------- 
Non-current loans and 
 advances to customers                    -              -    5,795            -    5,795 
---------------------------------  --------  -------------  -------  -----------  ------- 
Deferred tax asset                      601            106        -            -      707 
---------------------------------  --------  -------------  -------  -----------  ------- 
Non-current assets(b)                14,821          6,311    7,851           13   28,996 
---------------------------------  --------  -------------  -------  -----------  ------- 
 
Inventories and current 
 trade and other receivables(c)       2,389          1,048      338            -    3,775 
---------------------------------  --------  -------------  -------  -----------  ------- 
Current loans and advances 
 to customers                             -              -    4,166            -    4,166 
---------------------------------  --------  -------------  -------  -----------  ------- 
Current other investments                 -              -      156          128      284 
---------------------------------  --------  -------------  -------  -----------  ------- 
Total trade and other 
 payables                           (7,006)        (1,951)    (242)            -  (9,199) 
---------------------------------  --------  -------------  -------  -----------  ------- 
Total customer deposits 
 and deposits from banks                  -              -  (8,963)            -  (8,963) 
---------------------------------  --------  -------------  -------  -----------  ------- 
Total provisions                      (914)          (125)     (84)            -  (1,123) 
---------------------------------  --------  -------------  -------  -----------  ------- 
Deferred tax liability                  (7)           (67)     (14)            -     (88) 
---------------------------------  --------  -------------  -------  -----------  ------- 
Net current tax                       (579)           (13)      (8)            -    (600) 
---------------------------------  --------  -------------  -------  -----------  ------- 
Post-employment benefits            (6,600)           (21)        -            -  (6,621) 
---------------------------------  --------  -------------  -------  -----------  ------- 
Assets held for sale 
 and of the disposal group(d)           100             46        -          187      333 
---------------------------------  --------  -------------  -------  -----------  ------- 
Liabilities of the disposal 
 group(d)                                 -              -        -         (95)     (95) 
---------------------------------  --------  -------------  -------  -----------  ------- 
Net debt (including Tesco 
 Bank)(e)                                 -              -    (722)      (3,729)  (4,451) 
---------------------------------  --------  -------------  -------  -----------  ------- 
Net assets                            2,204          5,228    2,478      (3,496)    6,414 
---------------------------------  --------  -------------  -------  -----------  ------- 
 

(a) Excludes loans to joint ventures of GBP137m (2016: GBP149m) which forms part of Net debt.

(b) Excludes derivative financial instrument non-current assets of GBP1,303m (2016: GBP1,532m).

(c) Excludes net interest and other receivables of GBP1m (2016: GBP1m) which forms part of Net debt.

(d) Excludes Net debt of the disposal group of GBP(65)m. Refer to Note 7.

(e) Refer to Note 18.

 
                                      UK &                   Tesco 
                                       ROI  International     Bank  Unallocated    Total 
At 27 February 2016                   GBPm           GBPm     GBPm         GBPm     GBPm 
--------------------------------   -------  -------------  -------  -----------  ------- 
Goodwill, software and 
 other intangible assets             1,391            309    1,174            -    2,874 
---------------------------------  -------  -------------  -------  -----------  ------- 
Property, plant and equipment 
 and investment property            12,815          5,085       78            -   17,978 
---------------------------------  -------  -------------  -------  -----------  ------- 
Investments in joint 
 ventures and associates                 5            704       76            -      785 
---------------------------------  -------  -------------  -------  -----------  ------- 
Non-current other investments            -              -      927          151    1,078 
---------------------------------  -------  -------------  -------  -----------  ------- 
Non-current trade and 
 other receivables(a)                   31             21        -            -       52 
---------------------------------  -------  -------------  -------  -----------  ------- 
Non-current loans and 
 advances to customers                   -              -    4,723            -    4,723 
---------------------------------  -------  -------------  -------  -----------  ------- 
Deferred tax asset                       -             49        -            -       49 
---------------------------------  -------  -------------  -------  -----------  ------- 
Non-current assets(b)               14,242          6,168    6,978          151   27,539 
---------------------------------  -------  -------------  -------  -----------  ------- 
 
Inventories and current 
 trade and other receivables(c)      2,526            995      314            -    3,835 
---------------------------------  -------  -------------  -------  -----------  ------- 
Current loans and advances 
 to customers                            -              -    3,819            -    3,819 
---------------------------------  -------  -------------  -------  -----------  ------- 
Current other investments                -              -       57            -       57 
---------------------------------  -------  -------------  -------  -----------  ------- 
Total trade and other 
 payables                          (6,580)        (1,736)    (252)            -  (8,568) 
---------------------------------  -------  -------------  -------  -----------  ------- 
Total customer deposits 
 and deposits from banks                 -              -  (7,479)            -  (7,479) 
---------------------------------  -------  -------------  -------  -----------  ------- 
Total provisions                     (837)          (129)     (58)            -  (1,024) 
---------------------------------  -------  -------------  -------  -----------  ------- 
Deferred tax liability                (64)           (39)     (32)            -    (135) 
---------------------------------  -------  -------------  -------  -----------  ------- 
Net current tax                      (403)            (3)        2            -    (404) 
---------------------------------  -------  -------------  -------  -----------  ------- 
Post-employment benefits           (3,153)           (22)        -            -  (3,175) 
---------------------------------  -------  -------------  -------  -----------  ------- 
Assets held for sale 
 and of the disposal group(d)          165             71        -            -      236 
---------------------------------  -------  -------------  -------  -----------  ------- 
Liabilities of the disposal              -              -        -            -        - 
 group(d) 
--------------------------------   -------  -------------  -------  -----------  ------- 
Net debt (including Tesco 
 Bank)(e)                                -              -    (975)      (5,110)  (6,085) 
---------------------------------  -------  -------------  -------  -----------  ------- 
Net assets                           5,896          5,305    2,374      (4,959)    8,616 
---------------------------------  -------  -------------  -------  -----------  ------- 
 

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

Other segment information

 
                                                                         Total 
                                     UK &                   Tesco   continuing    Discontinued 
52 weeks ended 25 February            ROI  International     Bank   operations   operations(b)    Total 
 2017                                GBPm           GBPm     GBPm         GBPm            GBPm     GBPm 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
Capital expenditure (including 
 acquisitions through 
 business combinations): 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Property, plant and equipment 
   (a)                                995            386       12        1,393               2    1,395 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Investment property                   -              -        -            -               -        - 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Goodwill, software and 
   other intangible assets            111             16       34          161               -      161 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
Depreciation and amortisation: 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Property, plant and equipment     (687)          (349)     (17)      (1,053)             (5)  (1,058) 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Investment property                 (1)              -        -          (1)               -      (1) 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Software and other intangible 
   assets                           (117)           (26)    (101)        (244)             (1)    (245) 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
Impairment: 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Property, plant and equipment 
   loss                              (12)          (155)        -        (167)           (106)    (273) 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Property, plant and equipment 
   reversal                           118            161        -          279               -      279 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Investment property loss            (2)            (1)        -          (3)               -      (3) 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Investment property reversal          3              1        -            4               -        4 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Goodwill, software and 
   other intangible assets 
   loss                              (54)              -        -         (54)               -     (54) 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
  Goodwill, software and 
   other intangible assets 
   reversal                             -              1        -            1               -        1 
--------------------------------  -------  -------------  -------  -----------  --------------  ------- 
 

(a) Includes GBPnil (2016: GBP1,742m) of property, plant and equipment acquired through business combinations.

(b) Discontinued operations in this table represents amounts up until the point a disposal group is classified as such. This comprises those of Turkey in the first four months of the year ended 25 February 2017 and the 12 months of the year ended 27 February 2016. In the year ended 27 February 2016, discontinued operations also comprises the results of Korea for the first six months of the year.

 
                                                                        Total 
                                      UK &                 Tesco   continuing    Discontinued 
52 weeks ended 27 February             ROI  International   Bank   operations   operations(b)    Total 
 2016                                 GBPm           GBPm   GBPm         GBPm            GBPm     GBPm 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
Capital expenditure (including 
 acquisitions through 
 business combinations): 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
  Property, plant and equipment(a)   2,300            231      8        2,539              60    2,599 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
  Investment property                    5              -      -            5               -        5 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
  Goodwill, software and 
   other intangible assets             188             17     32          237               4      241 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
Depreciation and amortisation: 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
  Property, plant and equipment      (688)          (279)   (16)        (983)            (94)  (1,077) 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
  Investment property                  (2)              -      -          (2)               -      (2) 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
  Software and other intangible 
   assets                            (145)           (26)   (75)        (246)             (9)    (255) 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
Impairment: 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
  Property, plant and equipment 
   loss                              (164)           (98)      -        (262)             (1)    (263) 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
  Property, plant and equipment 
   reversal                            126            105      -          231              14      245 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
  Investment property loss               -            (2)      -          (2)               -      (2) 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
  Investment property reversal           7              -      -            7               -        7 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
  Goodwill, software and 
   other intangible assets 
   loss                              (177)           (10)      -        (187)               -    (187) 
-----------------------------------  -----  -------------  -----  -----------  --------------  ------- 
 

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

Cash flow statement

The following tables provide further analysis of the Group cash flow statement, including a split of cash flows between Retail and Tesco Bank as well as an analysis of Retail continuing and discontinued operations.

 
                                     Retail      Tesco Bank    Tesco Group 
                                  ------------  ------------  ------------- 
                                   2017   2016   2017   2016    2017   2016 
                                   GBPm   GBPm   GBPm   GBPm    GBPm   GBPm 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Operating profit/(loss) 
 of continuing operations(*)        940    911     77    161   1,017  1,072 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Operating profit/(loss) 
 of discontinued operations       (117)    102      -      -   (117)    102 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Depreciation and amortisation     1,186  1,243    118     91   1,304  1,334 
--------------------------------  -----  -----  -----  -----  ------  ----- 
ATM net income                     (43)   (38)     43     38       -      - 
--------------------------------  -----  -----  -----  -----  ------  ----- 
(Profit)/loss arising 
 on sale of property, plant 
 and equipment and intangible 
 assets                            (80)    165      2    (1)    (78)    164 
--------------------------------  -----  -----  -----  -----  ------  ----- 
(Profit)/loss arising 
 on sale of subsidiaries 
 and other investments                7      -    (4)      -       3      - 
--------------------------------  -----  -----  -----  -----  ------  ----- 
(Profit)/loss arising 
 on sale of joint ventures 
 and associates                     (5)    (1)      -      -     (5)    (1) 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Impairment loss on goodwill          46     18      -      -      46     18 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Net impairment loss/(reversal) 
 on other investments              (12)    (7)      -      -    (12)    (7) 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Net impairment loss/(reversal) 
 on loans/investments in 
 joint ventures and associates        -      1      -      -       -      1 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Net impairment loss/(reversal) 
 on property, plant and 
 equipment, intangible 
 assets and investment 
 property                           (5)    182      -      -     (5)    182 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Adjustment for non-cash 
 element of pensions charge           7  (395)      -      -       7  (395) 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Additional contribution 
 into pension schemes             (248)  (223)      -      -   (248)  (223) 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Share-based payments                 14    273      1     10      15    283 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Tesco Bank fair value 
 movements included in 
 operating profit                     -      -     98     72      98     72 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Cash flows generated from 
 operations excluding working 
 capital                          1,690  2,231    335    371   2,025  2,602 
--------------------------------  -----  -----  -----  -----  ------  ----- 
(Increase)/decrease in 
 working capital                    588    350   (55)  (518)     533  (168) 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Cash generated from/(used 
 in) operations                   2,278  2,581    280  (147)   2,558  2,434 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Interest received/(paid)          (518)  (422)    (4)    (4)   (522)  (426) 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Corporation tax received/(paid)    (64)    125     17    (7)    (47)    118 
--------------------------------  -----  -----  -----  -----  ------  ----- 
Net cash generated from/(used 
 in) operating activities         1,696  2,284    293  (158)   1,989  2,126 
--------------------------------  -----  -----  -----  -----  ------  ----- 
 

(*) Tesco Bank operating profit as per Bank income statement excluding ATM net income segmental adjustment.

 
                                          Retail        Tesco Bank     Tesco Group 
                                     ----------------  ------------  ---------------- 
                                        2017     2016   2017   2016     2017     2016 
                                        GBPm     GBPm   GBPm   GBPm     GBPm     GBPm 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Net cash generated from/(used 
 in) operating activities              1,696    2,284    293  (158)    1,989    2,126 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Purchase of property, plant 
 and equipment, investment 
 property and non-current 
 assets classified as held 
 for sale                            (1,199)    (858)    (6)   (13)  (1,205)    (871) 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Purchase of intangible assets          (129)    (146)   (40)   (21)    (169)    (167) 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Alternative performance 
 measure: Free cash flow                 368    1,280    247  (192)      615    1,088 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
 
Disposal of subsidiaries, 
 net of cash disposed                    205    3,237      -      -      205    3,237 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Acquisition of subsidiaries, 
 net of cash acquired                   (25)    (325)      -      -     (25)    (325) 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Proceeds from sale of joint 
 ventures and associates                   -      192      -      -        -      192 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Proceeds from sale of property, 
 plant and equipment, investment 
 property, intangible assets 
 and non-current assets classified 
 as held for sale                        509      350      3      -      512      350 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Net (increase)/decrease 
 in loans to joint ventures 
 and associates                           15      (1)      -      -       15      (1) 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Investments in joint ventures 
 and associates                            -     (77)      -      -        -     (77) 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Net (investments in)/proceeds 
 from sale of short-term 
 investments                             736  (2,894)      -      -      736  (2,894) 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Net (investments in)/proceeds 
 from sale of other investments          111       17     30  (120)      141    (103) 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Dividends received from 
 joint ventures and associates            28       41      -      -       28       41 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Interest received/(paid)                  41        3      -      -       41        3 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Net cash generated from/(used 
 in) investing activities                292    (461)   (13)  (154)      279    (615) 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
 
Proceeds from issue of ordinary 
 share capital                             1        1      -      -        1        1 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Increase in borrowings                   185      286      -    300      185      586 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Repayment of borrowings              (2,036)  (1,328)      -      -  (2,036)  (1,328) 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Net cash flows from derivative 
 financial instruments                   475      154      -      -      475      154 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Repayment of obligations 
 under finance leases                   (12)     (17)      -      -     (12)     (17) 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Dividends paid to equity 
 owners                                    -        -      -      -        -        - 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Net cash generated from/(used 
 in) financing activities            (1,387)    (904)      -    300  (1,387)    (604) 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
 
Intra-Group funding and 
 intercompany transactions                45       50   (45)   (50)        -        - 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
 
Net increase/(decrease) 
 in cash and cash equivalents            646      969    235   (62)      881      907 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Cash and cash equivalents 
 at the beginning of the 
 year                                  2,528    1,558    554    616    3,082    2,174 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Effect of foreign exchange 
 rate changes                          (131)        1      -      -    (131)        1 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Cash and cash equivalents 
 including cash held in disposal 
 group at the end of the 
 year                                  3,043    2,528    789    554    3,832    3,082 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Cash held in disposal group             (11)        -      -      -     (11)        - 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
Cash and cash equivalents 
 at the end of the year                3,032    2,528    789    554    3,821    3,082 
-----------------------------------  -------  -------  -----  -----  -------  ------- 
 
 
                                       Continuing     Discontinued 
                                       operations      operations        Retail 
                                     --------------  --------------  -------------- 
                                        2017   2016    2017    2016     2017   2016 
                                        GBPm   GBPm    GBPm    GBPm     GBPm   GBPm 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Operating profit/(loss)                  940    911   (117)     102      823  1,013 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Depreciation and amortisation          1,180  1,140       6     103    1,186  1,243 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
ATM net income                          (43)   (38)       -       -     (43)   (38) 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
(Profit)/loss arising on 
 sale of property, plant 
 and equipment and intangible 
 assets                                 (84)    167       4     (2)     (80)    165 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
(Profit)/loss arising on 
 sale of subsidiaries and 
 other investments                         7      -       -       -        7      - 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
(Profit)/loss arising on 
 sale of joint ventures and 
 associates                              (5)    (1)       -       -      (5)    (1) 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Impairment loss on goodwill               46     18       -       -       46     18 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Net impairment loss/(reversal) 
 on other investments                   (12)    (7)       -       -     (12)    (7) 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Net impairment loss/(reversal) 
 on loans/investments in 
 joint ventures and associates             -      1       -       -        -      1 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Net impairment loss/(reversal) 
 on property, plant and equipment, 
 intangible assets and investment 
 property                              (106)    195     101    (13)      (5)    182 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Adjustment for non-cash 
 element of pensions charge                6  (401)       1       6        7  (395) 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Additional contribution 
 into pension schemes                  (248)  (223)       -       -    (248)  (223) 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Share-based payments                      14    271       -       2       14    273 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Cash flow generated from 
 operations excluding working 
 capital                               1,695  2,033     (5)     198    1,690  2,231 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
(Increase)/decrease in working 
 capital                                 584     55       4     295      588    350 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Cash generated from/(used 
 in) operations                        2,279  2,088     (1)     493    2,278  2,581 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Interest received/(paid)               (499)  (379)    (19)    (43)    (518)  (422) 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Corporation tax received/(paid)         (64)    167       -    (42)     (64)    125 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Net cash generated from/(used 
 in) operating activities              1,716  1,876    (20)     408    1,696  2,284 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Purchase of property, plant 
 and equipment, investment 
 property and non-current 
 assets classified as held 
 for sale                            (1,193)  (770)     (6)    (88)  (1,199)  (858) 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Purchase of intangible assets          (129)  (145)       -     (1)    (129)  (146) 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
Alternative performance 
 measure: Free cash flow                 394    961    (26)     319      368  1,280 
-----------------------------------  -------  -----  ------  ------  -------  ----- 
 

Included within net impairment loss/(reversal) of property, plant and equipment and intangible assets for discontinued operations is GBP99m of impairment loss representing remeasurement to fair value less costs to sell of the Group's Turkish operations. Refer to Note 7.

Note 3 Income and expenses

 
                                                                  2017    2016 
Continuing operations                                             GBPm    GBPm 
--------------------------------------------------------------  ------  ------ 
Profit/(loss) before tax is stated after charging/(crediting) 
 the following: 
--------------------------------------------------------------  ------  ------ 
Property rental income, of which GBP38m (2016: 
 GBP39m) relates to investment properties                        (358)   (316) 
--------------------------------------------------------------  ------  ------ 
Other rental income                                               (50)    (53) 
--------------------------------------------------------------  ------  ------ 
Direct operating expenses arising on rental 
 earning investment properties                                      20      20 
--------------------------------------------------------------  ------  ------ 
Costs of inventories recognised as an expense                   41,140  39,534 
--------------------------------------------------------------  ------  ------ 
Inventory losses and provisions                                  1,337   1,252 
--------------------------------------------------------------  ------  ------ 
Depreciation and amortisation                                    1,298   1,231 
--------------------------------------------------------------  ------  ------ 
Operating lease expenses, of which GBP84m 
 (2016: GBP102m) relates to hire of plant and 
 machinery                                                       1,043   1,142 
--------------------------------------------------------------  ------  ------ 
Net impairment loss/(reversal) on property, 
 plant and equipment and investment property                     (113)      26 
--------------------------------------------------------------  ------  ------ 
Net impairment loss/(reversal) of goodwill, 
 software and other intangible assets                               53     187 
--------------------------------------------------------------  ------  ------ 
Net impairment loss/(reversal) of investments 
 in and loans to joint ventures and associates                       -       1 
--------------------------------------------------------------  ------  ------ 
 

Note 4 Exceptional items

Income statement

52 weeks ended 25 February 2017

Profit/(loss) for the period included the following exceptional items:

 
                                                                               Share 
                                                                               of JV                       Exceptional 
                                                      Total exceptional          and                             items 
                     Cost                  Property-     items included   associates                            within 
Exceptional items      of  Administrative    related   within operating     profits/  Finance             discontinued 
included            sales        expenses      items             profit     (losses)    costs  Taxation     operations 
in:                  GBPm            GBPm       GBPm               GBPm         GBPm     GBPm      GBPm           GBPm 
-----------------  ------  --------------  ---------  -----------------  -----------  -------  --------  ------------- 
Net restructuring 
 and 
 redundancy 
 costs(a)           (153)            (26)       (20)              (199)            -        -        39              - 
-----------------  ------  --------------  ---------  -----------------  -----------  -------  --------  ------------- 
Net impairment 
 (loss)/reversal 
 of non-current 
 assets 
 and onerous 
 lease 
 provisions(b)         25               -       (31)                (6)         (54)        -        20              - 
-----------------  ------  --------------  ---------  -----------------  -----------  -------  --------  ------------- 
Provision for 
 customer 
 redress(c)          (45)               -          -               (45)            -        -         -              - 
-----------------  ------  --------------  ---------  -----------------  -----------  -------  --------  ------------- 
Interchange 
 settlement(d)         57               -          -                 57            -        -      (11)              - 
-----------------  ------  --------------  ---------  -----------------  -----------  -------  --------  ------------- 
Amounts provided 
 in relation 
 to DPA and FCA 
 obligations(e)         -           (235)          -              (235)            -        -         -              - 
-----------------  ------  --------------  ---------  -----------------  -----------  -------  --------  ------------- 
Property 
 transactions(f)        -               -        165                165            -        -        50              - 
-----------------  ------  --------------  ---------  -----------------  -----------  -------  --------  ------------- 
Insurance reserve 
 adjustment(g)          -               -          -                  -         (23)        -         -              - 
-----------------  ------  --------------  ---------  -----------------  -----------  -------  --------  ------------- 
Foreign exchange 
 losses 
 on GBP short 
 term investments 
 held in overseas 
 entities 
 (h)                    -               -          -                  -            -    (244)         -              - 
-----------------  ------  --------------  ---------  -----------------  -----------  -------  --------  ------------- 
Exceptional items 
 relating 
 to discontinued 
 operations(i)          -               -          -                  -            -        -         -           (75) 
-----------------  ------  --------------  ---------  -----------------  -----------  -------  --------  ------------- 
Total               (116)           (261)        114              (263)         (77)    (244)        98           (75) 
-----------------  ------  --------------  ---------  -----------------  -----------  -------  --------  ------------- 
 

(a) This includes GBP164m relating to ongoing UK & ROI changes to the Group's distribution network and to store colleague structures and working practices. It also includes GBP35m relating to Tesco Bank business simplification and head office relocation cost.

(b) Net impairment (loss)/reversal of non-current assets includes a reversal of GBP103m in property, plant and equipment and investment property, a net GBP(53)m loss in goodwill, software and other intangible assets and a net charge of GBP(56)m of onerous lease provisions. Refer to Notes 10, 11 and 16 for further details on impairment. The GBP(54)m loss relates to the Group's share of impairment in Gain Land Limited following a fair valuation exercise of its investment properties.

(c) Updated guidance from the Financial Conduct Authority (FCA) proposing an extension to the expected Payment Protection Insurance (PPI) settlement deadline, inclusion of items that had previously been out of scope for settlement and higher operational costs and claim rates than previously estimated, have resulted in a provision of GBP45m.

(d) This relates to settlement of a legal case in respect of interchange fees.

(e) The Group has taken a total exceptional charge of GBP235m in respect of the Deferred Prosecution Agreement (DPA) of GBP129m, the expected costs of the compensation scheme of GBP85m, and related costs. This has been recorded in the financial statements in the year to 25 February 2017 as an adjusting post balance sheet event. Refer to Notes 16 and 22 for further details.

(f) As part of the Group's strategy to maximise value from property, the Group generated a profit on disposal of surplus properties and development sites of GBP74m. In addition, two malls in Central Europe were disposed of, generating a profit of GBP91m. There is a tax credit of GBP50m primarily due to a lower book value than tax value of assets disposed. Refer to item (b) overleaf for cash proceeds.

(g) The Group's share of the results for the year of its joint venture, Tesco Underwriting, reflects an adjustment to insurance reserves following a revision to the Ogden tables, which are used to calculate future losses in personal injury and fatal accident claims.

(h) The Group received GBP2.5bn of proceeds from the sale of the Korean operations in GBP money market funds in an intermediate entity with a Euro functional currency. Over the year, this has generated a GBP244m loss which represents foreign exchange losses arising on the revaluation of these sterling-denominated funds into Euros. The loss does not represent an economic loss to the Group since there is an offset within other comprehensive income.

(i) On 10 June 2016, the Group announced the proposed sale of its Turkish operations. This charge includes: an impairment of GBP(99)m following a remeasurement of the assets and liabilities of the Turkish operations to fair value less costs to sell; GBP(3)m of costs to sell the Turkish operations and GBP27m of net adjustments on profits/(losses) of past disposals. Refer to Note 7 for further details.

52 weeks ended 27 February 2016

Profit/(loss) for the period included the following exceptional items:

 
                                                                   Total exceptional 
                                                                      items included                       Exceptional 
                                  Cost                  Property-             within                      items within 
                                    of  Administrative    related          operating  Finance             discontinued 
Exceptional items                sales        expenses      items             profit    costs  Taxation     operations 
 included in:                     GBPm            GBPm       GBPm               GBPm     GBPm      GBPm           GBPm 
------------------------------  ------  --------------  ---------  -----------------  -------  --------  ------------- 
Net impairment (loss)/reversal 
 of non-current assets 
 and onerous lease 
 provisions                      (314)               -      (109)              (423)        -        73             15 
------------------------------  ------  --------------  ---------  -----------------  -------  --------  ------------- 
Net restructuring 
 and redundancy costs             (75)            (34)       (17)              (126)        -         9              - 
------------------------------  ------  --------------  ---------  -----------------  -------  --------  ------------- 
Property transactions                -               -        156                156        -      (20)              - 
------------------------------  ------  --------------  ---------  -----------------  -------  --------  ------------- 
Past service credit 
 and other associated 
 costs                             424              56          -                480        -      (86)              - 
------------------------------  ------  --------------  ---------  -----------------  -------  --------  ------------- 
Foreign exchange 
 losses on GBP balances 
 held in overseas 
 entities                            -               -          -                  -    (220)         -              - 
------------------------------  ------  --------------  ---------  -----------------  -------  --------  ------------- 
Release of overprovision 
 of tax liabilities 
 in prior years                      -               -          -                  -        -        86              - 
------------------------------  ------  --------------  ---------  -----------------  -------  --------  ------------- 
Loss on disposal 
 of Korean operations                -               -          -                  -        -         -          (168) 
------------------------------  ------  --------------  ---------  -----------------  -------  --------  ------------- 
Total                               35              22         30                 87    (220)        62          (153) 
------------------------------  ------  --------------  ---------  -----------------  -------  --------  ------------- 
 

Cash flow statement

The table below shows the impact of exceptional items on the Group cash flow statement:

 
                                                   Cash flows from          Cash flows from 
                                                 operating activities     investing activities 
                                               -----------------------  ----------------------- 
                                                      2017        2016         2017        2016 
                                                      GBPm        GBPm         GBPm        GBPm 
---------------------------------------------  -----------  ----------  -----------  ---------- 
Prior year restructuring costs and other 
 exceptional costs including trading store 
 redundancies(a)                                      (54)       (251)            -           - 
---------------------------------------------  -----------  ----------  -----------  ---------- 
Current year restructuring costs and other 
 exceptional costs including trading store 
 redundancies(a)                                      (78)        (63)            -           - 
---------------------------------------------  -----------  ----------  -----------  ---------- 
Utilisation of onerous lease provisions              (113)        (90)            -           - 
---------------------------------------------  -----------  ----------  -----------  ---------- 
Property transactions(b)                                36         218          490           - 
---------------------------------------------  -----------  ----------  -----------  ---------- 
Provision for customer redress(c)                     (28)        (34)            -           - 
---------------------------------------------  -----------  ----------  -----------  ---------- 
Legal settlement                                        57           -            -           - 
---------------------------------------------  -----------  ----------  -----------  ---------- 
Exceptional cash flows from discontinued 
 operations                                              2           -            -           - 
---------------------------------------------  -----------  ----------  -----------  ---------- 
Defined benefit pension scheme closure cost              -        (58)            -           - 
---------------------------------------------  -----------  ----------  -----------  ---------- 
Property transactions - buy-back of property 
 joint ventures, net of GBP15m cash acquired             -           -            -       (139) 
---------------------------------------------  -----------  ----------  -----------  ---------- 
Total                                                (178)       (278)          490       (139) 
---------------------------------------------  -----------  ----------  -----------  ---------- 
 

(a) Cash outflows on settlement of restructuring and redundancy costs.

(b) The proceeds from property transactions totalled GBP526m comprising GBP490m net proceeds from the sale of two malls in Central Europe and other properties in the UK & ROI, and GBP36m for development sites in UK & ROI. Refer to item (f) on the previous page.

(c) Settlement of claims for customer redress in Tesco Bank.

Note 5 Finance income and costs

 
                                                     2017   2016 
 Continuing operations                               GBPm   GBPm 
--------------------------------------------------  -----  ----- 
Finance income 
--------------------------------------------------  -----  ----- 
Interest receivable and similar income                 48     29 
--------------------------------------------------  -----  ----- 
Financial instruments - fair value remeasurements      61      - 
--------------------------------------------------  -----  ----- 
Total finance income                                  109     29 
--------------------------------------------------  -----  ----- 
Finance costs 
--------------------------------------------------  -----  ----- 
GBP MTNs and Loans                                  (227)  (176) 
--------------------------------------------------  -----  ----- 
EUR MTNs                                            (114)  (122) 
--------------------------------------------------  -----  ----- 
USD Bonds                                            (93)   (86) 
--------------------------------------------------  -----  ----- 
Finance charges payable under finance leases 
 and hire purchase contracts                          (8)    (9) 
--------------------------------------------------  -----  ----- 
Other interest payable                               (81)   (97) 
--------------------------------------------------  -----  ----- 
Capitalised interest (Note 11)*                         6      6 
--------------------------------------------------  -----  ----- 
Financial instruments - fair value remeasurements       -   (19) 
--------------------------------------------------  -----  ----- 
Total finance costs before exceptional items 
 and net pension finance costs                      (517)  (503) 
--------------------------------------------------  -----  ----- 
Net pension finance costs (Note 17)                 (113)  (155) 
--------------------------------------------------  -----  ----- 
Foreign exchange losses on GBP short-term 
 investments held in overseas entities (Note 
 4)                                                 (244)  (220) 
--------------------------------------------------  -----  ----- 
Total finance costs                                 (874)  (878) 
--------------------------------------------------  -----  ----- 
Net finance cost                                    (765)  (849) 
--------------------------------------------------  -----  ----- 
 

(*) A deferred tax liability is recognised in respect of capitalised interest at the applicable rate in the country in which the interest is capitalised.

Note 6 Taxation

Recognised in the Group income statement

 
                                                     2017   2016 
Continuing operations                                GBPm   GBPm 
--------------------------------------------------  -----  ----- 
Current tax (credit)/charge 
--------------------------------------------------  -----  ----- 
UK corporation tax                                     70     81 
--------------------------------------------------  -----  ----- 
Release of UK provisions for uncertain tax 
 positions - exceptional credit                         -   (86) 
--------------------------------------------------  -----  ----- 
Foreign tax                                           111     73 
--------------------------------------------------  -----  ----- 
Adjustments in respect of prior years                  19  (191) 
--------------------------------------------------  -----  ----- 
                                                      200  (123) 
--------------------------------------------------  -----  ----- 
Deferred tax (credit)/charge 
--------------------------------------------------  -----  ----- 
Origination and reversal of temporary differences    (43)   (69) 
--------------------------------------------------  -----  ----- 
Adjustments in respect of prior years(*)             (36)    169 
--------------------------------------------------  -----  ----- 
Change in tax rate                                   (34)   (31) 
--------------------------------------------------  -----  ----- 
                                                    (113)     69 
--------------------------------------------------  -----  ----- 
Total income tax (credit)/charge                       87   (54) 
--------------------------------------------------  -----  ----- 
 

(*) Prior year adjustments include a tax credit of GBP24m in relation to an impairment reversal classified as exceptional.

The Finance Act 2016 included legislation to reduce the main rate of UK corporation tax from 20% to 19% from 1 April 2017 and to 17% from 1 April 2020. These rate reductions were substantively enacted by the balance sheet date and therefore included in these consolidated financial statements. Temporary differences have been remeasured using the enacted tax rates that are expected to apply when the liability is settled or the asset realised.

Reconciliation of effective tax charge

 
                                                       2017     2016 
                                                       GBPm     GBPm 
----------------------------------------------------  -----  ------- 
Profit/(loss) before tax                                145      202 
----------------------------------------------------  -----  ------- 
Tax credit/(charge) at 20% (2016: 20.1%)               (29)     (41) 
----------------------------------------------------  -----  ------- 
Effect of: 
----------------------------------------------------  -----  ------- 
  Non-qualifying depreciation                          (33)     (49) 
----------------------------------------------------  -----  ------- 
  Other non-deductible items(a)                        (82)      (4) 
----------------------------------------------------  -----  ------- 
  Unrecognised tax losses                              (48)    (103) 
----------------------------------------------------  -----  ------- 
  Release of provisions for uncertain tax positions 
   - exceptional credit                                   -       86 
----------------------------------------------------  -----  ------- 
  Property items taxed on a different basis 
   to accounting entries(b)                              77      114 
----------------------------------------------------  -----  ------- 
  Banking surcharge tax                                (17)      (3) 
----------------------------------------------------  -----  ------- 
  Differences in overseas taxation rates                 15        5 
----------------------------------------------------  -----  ------- 
  Adjustments in respect of prior years                  17       22 
----------------------------------------------------  -----  ------- 
  Share of losses of joint ventures and associates     (21)      (4) 
----------------------------------------------------  -----  ------- 
  Change in tax rate                                     34       31 
----------------------------------------------------  -----  ------- 
Total income tax credit/(charge) for the year          (87)       54 
----------------------------------------------------  -----  ------- 
Effective tax rate                                    60.0%  (26.6%) 
----------------------------------------------------  -----  ------- 
 

(a) This includes expenses not qualifying for tax relief including DPA and FCA obligations provision, impairments and movements in uncertain tax positions partially offset by non-taxable income.

(b) This includes property items with differences in the book value and the valuation for tax purposes in addition to recognition of capital losses on property asset disposals.

Reconciliation of effective tax charge on alternative performance measures

 
                                                       2017   2016 
                                                       GBPm   GBPm 
----------------------------------------------------  -----  ----- 
Profit/(loss) before tax before exceptional 
 items                                                  729    335 
----------------------------------------------------  -----  ----- 
Tax credit/(charge) at 20% (2016: 20.1%)              (146)   (67) 
----------------------------------------------------  -----  ----- 
Effect of: 
----------------------------------------------------  -----  ----- 
  Non-qualifying depreciation                          (33)   (30) 
----------------------------------------------------  -----  ----- 
  Other non-deductible items(a)                        (50)    (4) 
----------------------------------------------------  -----  ----- 
  Unrecognised tax losses                              (14)   (59) 
----------------------------------------------------  -----  ----- 
  Property items taxed on a different basis 
   to accounting entries(b)                             (1)    102 
----------------------------------------------------  -----  ----- 
  Banking surcharge tax                                (17)    (3) 
----------------------------------------------------  -----  ----- 
  Differences in overseas taxation rates                (7)      8 
----------------------------------------------------  -----  ----- 
  Adjustments in respect of prior years                  39     22 
----------------------------------------------------  -----  ----- 
  Share of losses of joint ventures and associates      (5)    (4) 
----------------------------------------------------  -----  ----- 
  Change in tax rate                                     49     27 
----------------------------------------------------  -----  ----- 
Total income tax credit/(charge) for the year         (185)    (8) 
----------------------------------------------------  -----  ----- 
Effective tax rate before exceptional items           25.4%   2.4% 
----------------------------------------------------  -----  ----- 
Net pension finance costs                               113    155 
----------------------------------------------------  -----  ----- 
Tax charge at 20% (2016: 20.1%)                        (23)   (31) 
----------------------------------------------------  -----  ----- 
Change in tax rate                                        4      3 
----------------------------------------------------  -----  ----- 
Total income tax credit/(charge) before exceptional 
 items and net pension finance cost for the 
 year                                                 (204)   (36) 
----------------------------------------------------  -----  ----- 
Effective tax rate before exceptional items 
 and net pension finance costs                        24.2%   7.3% 
----------------------------------------------------  -----  ----- 
 

(a) This includes expenses not qualifying for tax relief, impairments and movements in uncertain tax positions partially offset by non-taxable income.

(b) This includes property items with differences in the book value and the valuation for tax purposes in addition to recognition of capital losses on property asset disposals.

Note 7 Discontinued operations and non-current assets classified as held for sale

Assets and liabilities of the disposal group and non-current assets classified as held for sale

 
                                                     25 February  27 February 
                                                            2017         2016 
                                                            GBPm         GBPm 
---------------------------------------------------  -----------  ----------- 
Assets of the disposal group                                 198            - 
---------------------------------------------------  -----------  ----------- 
Non-current assets classified as held for 
 sale                                                        146          236 
---------------------------------------------------  -----------  ----------- 
Total assets of the disposal group and non-current 
 assets classified as held for sale                          344          236 
---------------------------------------------------  -----------  ----------- 
Total liabilities of the disposal group                    (171)            - 
---------------------------------------------------  -----------  ----------- 
Total net assets of the disposal group and 
 non-current assets classified as held for 
 sale                                                        173          236 
---------------------------------------------------  -----------  ----------- 
 

The non-current assets classified as held for sale consist mainly of properties in the UK and Central Europe due to be sold within one year.

Discontinued operations

On 10 June 2016, the Group announced the proposed sale of its 95.5% controlling interest in Tesco Kipa Kitle Pazarlama Ticaret Lojistik ve Gıda Sanayi A. . (referred to as Turkish operations or Turkey) to Migros Ticaret A. (Migros). In accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', the assets and liabilities related to the Turkish operations have been classified as a disposal group held for sale within the period. Local regulatory approval was granted on 9 February 2017 and the sale completed on 1 March 2017.

At year end, an impairment charge of GBP99m has been recognised in property, plant and equipment primarily based on the latest completion statement as at 1 March 2017 reflecting fair value less costs to sell. This impairment has been included as an exceptional item within discontinued operations. The gain/(loss) on disposal at completion will also reflect the impact of recycling of Turkey's currency translation reserve; at the year end the recycling would have increased the loss on sale by GBP119m. The equivalent amount for the recycling of the currency translation reserve at the date of disposal will be recorded as a non-cash loss within discontinued operations in the year ending 24 February 2018.

The tables on the next page show the results of the discontinued operations which are included in the Group income statement, Group balance sheet and Group cash flow statement respectively. The comparative includes the Korean operations, which were sold on 22 October 2015 and disclosed as discontinued in the 2016 Annual Report.

 
                           Income statement      2017            2016 
                                             --------  ------------------------ 
                                             Total(a)  Turkey    Korea    Total 
                                                 GBPm    GBPm     GBPm     GBPm 
-------------------------------------------  --------  ------  -------  ------- 
Revenue                                           543     500    3,526    4,026 
-------------------------------------------  --------  ------  -------  ------- 
Expenses(b)                                     (580)   (555)  (3,404)  (3,959) 
-------------------------------------------  --------  ------  -------  ------- 
Profit/(loss) before tax before 
 exceptional items                               (37)    (55)      122       67 
-------------------------------------------  --------  ------  -------  ------- 
Taxation                                            -       -     (41)     (41) 
-------------------------------------------  --------  ------  -------  ------- 
Profit/(loss) after tax before exceptional 
 items                                           (37)    (55)       81       26 
-------------------------------------------  --------  ------  -------  ------- 
Net impairment (loss)/reversal of 
 non-current assets and onerous lease 
 provisions                                      (99)      15        -       15 
-------------------------------------------  --------  ------  -------  ------- 
Costs to sell and other provisions 
 - Turkey                                         (3)       -        -        - 
-------------------------------------------  --------  ------  -------  ------- 
Loss after tax on disposal of Korean 
 operations                                         -       -    (168)    (168) 
-------------------------------------------  --------  ------  -------  ------- 
Net adjustments to profit/(loss) 
 of past disposals                                 27       -        -        - 
-------------------------------------------  --------  ------  -------  ------- 
Total profit/(loss) after tax of 
 discontinued operations(c)                     (112)    (40)     (87)    (127) 
-------------------------------------------  --------  ------  -------  ------- 
 

(a) These figures represent the income statement of Turkey for the current year and the net adjustments to profit/(loss) of past disposals of GBP27m.

(b) Intercompany recharges totalling GBP2m (2016: GBP2m) between continuing operations and the Turkey discontinued operation have been eliminated and intercompany recharges and intercompany loan interest totalling GBP48m between continuing operations and the Korea discontinued operation have been eliminated in 2016. These eliminations impact the performance of continuing and discontinued operations, reducing the profit/(loss) before tax of continuing operations by GBP2m (2016: GBP50m), whilst increasing the profit/(loss) before tax of Turkey and Korea discontinued operations by the same respective amounts.

(c) Total profit/(loss) after tax of discontinued operations includes a loss of GBP6m attributable to non-controlling interests (2016: loss of GBP2m).

 
Loss per share impact from discontinued           2017          2016 
 operations                                Pence/share   Pence/share 
----------------------------------------  ------------  ------------ 
Basic                                           (1.30)        (1.54) 
----------------------------------------  ------------  ------------ 
Diluted                                         (1.30)        (1.53) 
----------------------------------------  ------------  ------------ 
 
 
Balance sheet                             Turkey 
                                            2017 
                                            GBPm 
----------------------------------------  ------ 
Assets of the disposal group 
----------------------------------------  ------ 
Goodwill and other intangible assets           9 
----------------------------------------  ------ 
Property, plant and equipment                121 
----------------------------------------  ------ 
Inventories                                   43 
----------------------------------------  ------ 
Trade and other receivables                   14 
----------------------------------------  ------ 
Cash and cash equivalents                     11 
----------------------------------------  ------ 
Total assets of the disposal group           198 
----------------------------------------  ------ 
Trade and other payables                    (88) 
----------------------------------------  ------ 
Borrowings                                  (76) 
----------------------------------------  ------ 
Other liabilities                            (7) 
----------------------------------------  ------ 
Total liabilities of the disposal group    (171) 
----------------------------------------  ------ 
Total net assets of the disposal group        27 
----------------------------------------  ------ 
 

Cash flow statement

 
                                                              Korea 
                                                                and 
                                                    Turkey   Turkey 
                                                      2017     2016 
                                                      GBPm     GBPm 
--------------------------------------------------  ------  ------- 
Net cash flows from operating activities              (20)      408 
--------------------------------------------------  ------  ------- 
Net cash flows from investing activities                13     (20) 
--------------------------------------------------  ------  ------- 
Net cash flows from financing activities                21        8 
--------------------------------------------------  ------  ------- 
Net cash flows from discontinued operations             14      396 
--------------------------------------------------  ------  ------- 
Intra-Group funding and intercompany transactions      (2)    (108) 
--------------------------------------------------  ------  ------- 
Net cash flows from discontinued operations, 
 net of intercompany                                    12      288 
--------------------------------------------------  ------  ------- 
Net cash flows from disposal of subsidiary               -    (366) 
--------------------------------------------------  ------  ------- 
Net cash flows from discontinued operations, 
 net of intercompany and disposal of subsidiary         12     (78) 
--------------------------------------------------  ------  ------- 
 

Note 8 Dividends

No dividend has been paid or is proposed in respect of the financial year ended 25 February 2017 (2016: GBPnil).

Note 9 Earnings/(losses) per share and diluted earnings/(losses) per share

Basic earnings/(losses) per share amounts are calculated by dividing the profit/(loss) attributable to owners of the parent by the weighted average number of ordinary shares in issue during the financial year.

Diluted earnings/(losses) per share amounts are calculated by dividing the profit/(loss) attributable to owners of the parent by the weighted average number of ordinary shares in issue during the financial year adjusted for the effects of potentially dilutive options. The dilutive effect is calculated on the full exercise of all potentially dilutive ordinary share options granted by the Group, including performance-based options which the Group considers to have been earned.

For the 52 weeks ended 25 February 2017 there were 20 million (2016: 26 million) potentially dilutive share options. As the Group has recognised a profit for the period from its continuing operations, dilutive effects have been considered in calculating diluted earnings per share.

 
                                         2017                          2016 
                             ----------------------------  ---------------------------- 
                                     Potentially                   Potentially 
                                        dilutive                      dilutive 
                                           share                         share 
                              Basic      options  Diluted   Basic      options  Diluted 
---------------------------  ------  -----------  -------  ------  -----------  ------- 
Profit/(loss) (GBPm) 
---------------------------  ------  -----------  -------  ------  -----------  ------- 
Continuing operations(a)         66            -       66     263            -      263 
---------------------------  ------  -----------  -------  ------  -----------  ------- 
Discontinued operations(b)    (106)            -    (106)   (125)            -    (125) 
---------------------------  ------  -----------  -------  ------  -----------  ------- 
Total                          (40)            -     (40)     138            -      138 
---------------------------  ------  -----------  -------  ------  -----------  ------- 
Weighted average number 
 of shares (millions)         8,148           20    8,168   8,126           26    8,152 
---------------------------  ------  -----------  -------  ------  -----------  ------- 
Earnings/(losses) 
 per share (pence) 
---------------------------  ------  -----------  -------  ------  -----------  ------- 
Continuing operations          0.81            -     0.81    3.24       (0.02)     3.22 
---------------------------  ------  -----------  -------  ------  -----------  ------- 
Discontinued operations      (1.30)            -   (1.30)  (1.54)         0.01   (1.53) 
---------------------------  ------  -----------  -------  ------  -----------  ------- 
Total                        (0.49)            -   (0.49)    1.70       (0.01)     1.69 
---------------------------  ------  -----------  -------  ------  -----------  ------- 
 

(a) Excludes losses from non-controlling interest of GBP8m (2016: GBP7m).

(b) Excludes losses from non-controlling interests of GBP6m (2016: GBP2m).

Alternative performance measure: Earnings/(losses) per share and diluted earnings/(losses) per share from continuing operations before exceptional items

 
                                        2017                         2016 
                             ------  -----------  -------  -----  -----------  ------- 
                                     Potentially                  Potentially 
                                        dilutive                     dilutive 
                                           share                        share 
                              Basic      options  Diluted  Basic      options  Diluted 
---------------------------  ------  -----------  -------  -----  -----------  ------- 
Profit/(loss) (GBPm) 
---------------------------  ------  -----------  -------  -----  -----------  ------- 
Continuing operations(a)        551            -      551    330            -      330 
---------------------------  ------  -----------  -------  -----  -----------  ------- 
Discontinued operations(b)     (36)            -     (36)     29            -       29 
---------------------------  ------  -----------  -------  -----  -----------  ------- 
Total                           515            -      515    359            -      359 
---------------------------  ------  -----------  -------  -----  -----------  ------- 
Weighted average number 
 of shares (millions)         8,148           20    8,168  8,126           26    8,152 
---------------------------  ------  -----------  -------  -----  -----------  ------- 
Earnings/(losses) 
 per share (pence) 
---------------------------  ------  -----------  -------  -----  -----------  ------- 
Continuing operations          6.76       (0.01)     6.75   4.06       (0.01)     4.05 
---------------------------  ------  -----------  -------  -----  -----------  ------- 
Discontinued operations      (0.44)            -   (0.44)   0.36       (0.01)     0.35 
---------------------------  ------  -----------  -------  -----  -----------  ------- 
Total                          6.32       (0.01)     6.31   4.42       (0.02)     4.40 
---------------------------  ------  -----------  -------  -----  -----------  ------- 
 

(a) Excludes losses from non-controlling interest of GBP7m (2016: GBP3m).

(b) Excludes losses from non-controlling interests of GBP1m (2016: GBP3m).

Alternative performance measure: Diluted earnings/(losses) per share from continuing operations before exceptional items and net pension finance costs

 
                                                     2017   2016 
                                                    -----  ----- 
Profit before tax from continuing operations 
 before exceptional items (GBPm)                      729    335 
--------------------------------------------------  -----  ----- 
Add: Net pension finance costs (GBPm)                 113    155 
--------------------------------------------------  -----  ----- 
Profit before tax from continuing operations 
 before exceptional items and net pension finance 
 costs (GBPm)                                         842    490 
--------------------------------------------------  -----  ----- 
Profit before tax from continuing operations 
 before exceptional items and net pension finance 
 costs attributable to the owners of the parent 
 (GBPm)                                               845    494 
--------------------------------------------------  -----  ----- 
Taxation on profit from continuing operations 
 before exceptional items and net pension finance 
 costs attributable to the owners of the parent 
 (GBPm)                                             (200)   (37) 
--------------------------------------------------  -----  ----- 
Profit after tax from continuing operations 
 before exceptional items and net pension finance 
 costs attributable to the owners of the parent 
 (GBPm)                                               645    457 
--------------------------------------------------  -----  ----- 
Diluted weighted average number of shares 
 (millions)                                         8,168  8,152 
--------------------------------------------------  -----  ----- 
Diluted earnings per share from continuing 
 operations before exceptional items and net 
 pension finance costs (pence)                       7.90   5.61 
--------------------------------------------------  -----  ----- 
 

Refer to page 52 for further detail on the Group's APMs.

Note 10 Goodwill, software and other intangible assets

Goodwill, software and other intangible assets of GBP2,717m (2016: GBP2,874m) comprise GBP1,792m goodwill (2016: GBP1,827m), GBP879m software (2016: GBP975m) and other intangible assets of GBP46m (2016: GBP72m).

Impairment of goodwill

The goodwill balances, discount rates and long-term growth rates for each group of cash-generating units are shown below:

 
               Balances         Pre-tax           Post-tax         Long- term 
                 GBPm        discount rates     discount rates     growth rates 
             ------------  -----------------  -----------------  --------------- 
              2017   2016      2017     2016      2017     2016     2017    2016 
-----------  -----  -----  --------  -------  --------  -------  -------  ------ 
Tesco Bank     802    802     12.0%    11.0%      9.1%     8.2%     3.0%    4.0% 
-----------  -----  -----  --------  -------  --------  -------  -------  ------ 
UK(*)          735    796      9.3%     9.1%      7.5%     7.2%     2.0%    2.0% 
-----------  -----  -----  --------  -------  --------  -------  -------  ------ 
Thailand       181    159     10.0%    10.1%      8.0%     8.1%     2.7%    2.6% 
-----------  -----  -----  --------  -------  --------  -------  -------  ------ 
Malaysia        74     70     12.4%    12.3%      9.4%     9.4%     2.3%    2.1% 
-----------  -----  -----  --------  -------  --------  -------  -------  ------ 
             1,792  1,827 
-----------  -----  -----  --------  -------  --------  -------  -------  ------ 
 

(*) Included in the UK prior year balance is GBP29m previously disclosed as Other.

Goodwill arising on business combinations is not amortised but is reviewed for impairment on an annual basis, or more frequently if there are indications that goodwill may be impaired. Goodwill acquired in a business combination is allocated to groups of cash-generating units according to the level at which management monitor that goodwill.

Impairment reviews were performed by comparing the carrying value of goodwill with the recoverable amount of the cash-generating units to which goodwill has been allocated. Recoverable amounts for cash-generating units are the higher of fair value less costs of disposal, and value in use. The key estimates for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins.

Management estimates discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. The pre-tax discount rates used to calculate value in use are derived from the Group's post-tax weighted average cost of capital, as adjusted for the specific risks relating to each cash-generating unit.

Cash flow projections are based on the Group's three year internal forecasts, the results of which are reviewed by the Board. Estimates of selling prices and direct costs are based on past experience and expectations of future changes in the market. The forecasts are extrapolated to five years based on management's expectations, and beyond five years based on estimated long-term average growth rates as shown above. These long-term growth rates for the Retail business are based on inflation forecasts by recognised bodies. The long-term growth rate for Tesco Bank is based on inflation and GDP growth forecasts by recognised bodies.

Goodwill related to the Sociomantic acquisition of GBP46m, within the UK balance, was fully impaired in the year due to lower forecast cash flows for the business. This charge has been classified as an exceptional item within 'Net impairment of non-current assets and onerous lease provisions' within cost of sales.

The Group has carried out a sensitivity analysis on the impairment tests of each group of cash-generating units to which goodwill has been allocated. A reasonably possible increase in the discount rate or reduction in the long-term growth rate by one percentage point, would not indicate impairment in any group of cash-generating units apart from Malaysia where an increase in the discount rate by one percentage point would reduce the recoverable value by GBP90m to its carrying value of GBP74m.

Impairment of software and other intangible assets

A net impairment loss of GBP7m has been recognised against software and other intangible assets as part of the impairment review discussed in Note 11. This loss has been classified as an exceptional item within 'Net impairment of non-current assets and onerous lease provisions' within cost of sales. Of the prior year impairment loss of GBP169m, a loss of GBP154m was recognised principally as a result of an evaluation of the cash-generating unit for technology relating to online general merchandising as the Group moved towards a single online platform for customers.

Note 11 Property, plant and equipment

 
                                                   Land 
                                                    and 
                                              buildings  Other(a)    Total 
                                                   GBPm      GBPm     GBPm 
                                             ----------  --------  ------- 
Cost 
-------------------------------------------  ----------  --------  ------- 
At 27 February 2016                              22,557    10,468   33,025 
-------------------------------------------  ----------  --------  ------- 
Foreign currency translation                        727       327    1,054 
-------------------------------------------  ----------  --------  ------- 
Additions(b)                                        816       579    1,395 
-------------------------------------------  ----------  --------  ------- 
Reclassification                                  (103)        58     (45) 
-------------------------------------------  ----------  --------  ------- 
Classified as held for sale                       (316)       (6)    (322) 
-------------------------------------------  ----------  --------  ------- 
Disposals                                         (674)     (594)  (1,268) 
-------------------------------------------  ----------  --------  ------- 
Transfer to disposal group classified 
 as held for sale                                 (317)     (151)    (468) 
-------------------------------------------  ----------  --------  ------- 
At 25 February 2017                              22,690    10,681   33,371 
-------------------------------------------  ----------  --------  ------- 
Accumulated depreciation and impairment 
 losses 
-------------------------------------------  ----------  --------  ------- 
At 27 February 2016                               7,198     7,927   15,125 
-------------------------------------------  ----------  --------  ------- 
Foreign currency translation                        258       239      497 
-------------------------------------------  ----------  --------  ------- 
Charge for the year                                 419       639    1,058 
-------------------------------------------  ----------  --------  ------- 
Impairment losses                                   246        27      273 
-------------------------------------------  ----------  --------  ------- 
Reversal of impairment losses                     (246)      (33)    (279) 
-------------------------------------------  ----------  --------  ------- 
Reclassification                                   (58)        11     (47) 
-------------------------------------------  ----------  --------  ------- 
Classified as held for sale                       (137)       (1)    (138) 
-------------------------------------------  ----------  --------  ------- 
Disposals                                         (353)     (539)    (892) 
-------------------------------------------  ----------  --------  ------- 
Transfer to disposal group classified 
 as held for sale                                 (232)     (102)    (334) 
-------------------------------------------  ----------  --------  ------- 
At 25 February 2017                               7,095     8,168   15,263 
-------------------------------------------  ----------  --------  ------- 
 
Net carrying value 
-------------------------------------------  ----------  --------  ------- 
At 25 February 2017                              15,595     2,513   18,108 
-------------------------------------------  ----------  --------  ------- 
At 27 February 2016                              15,359     2,541   17,900 
-------------------------------------------  ----------  --------  ------- 
 
Construction in progress included above(c) 
-------------------------------------------  ----------  --------  ------- 
At 25 February 2017                                  57        66      123 
-------------------------------------------  ----------  --------  ------- 
At 27 February 2016                                 121        63      184 
-------------------------------------------  ----------  --------  ------- 
 

(a) Other assets consist of fixtures and fittings with a net carrying value of GBP2,023m (2016: GBP2,145m), office equipment with a net carrying value of GBP161m (2016: GBP144m) and motor vehicles with a net carrying value of GBP329m (2016: GBP252m).

(b) Includes GBP6m (2016: GBP7m) in respect of interest capitalised, principally relating to land and building assets. The capitalisation rate used to determine the amount of finance costs capitalised during the financial year was 4.9% (2016: 4.6%). Interest capitalised is deducted in determining taxable profit in the financial year in which it is incurred.

((c) Construction in progress does not include land.

Assets held under finance leases

Net carrying value includes assets held under finance leases, which are analysed below. These assets are pledged as security for the finance lease liabilities.

 
                            2017                 2016 
-------------------  -------------------  ------------------- 
                           Land                 Land 
                            and                  and 
                      buildings    Other   buildings    Other 
                           GBPm     GBPm        GBPm     GBPm 
-------------------  ----------  -------  ----------  ------- 
Net carrying value           66       27          55       21 
-------------------  ----------  -------  ----------  ------- 
 

Land and buildings

 
The net carrying value of land and buildings     2017    2016 
 comprises:                                      GBPm    GBPm 
---------------------------------------------  ------  ------ 
Freehold                                       13,175  13,005 
---------------------------------------------  ------  ------ 
Long leasehold - 50 years or more                 404     491 
---------------------------------------------  ------  ------ 
Short leasehold - less than 50 years            2,016   1,863 
---------------------------------------------  ------  ------ 
Net carrying value                             15,595  15,359 
---------------------------------------------  ------  ------ 
 

In the current year the Group reclassified property, plant and equipment with a net book value of GBPnil (2016: GBP8m) to development properties in inventories.

 
                                                Land 
                                                 and 
                                           buildings  Other(a)    Total 
                                                GBPm      GBPm     GBPm 
----------------------------------------  ----------  --------  ------- 
Cost 
----------------------------------------  ----------  --------  ------- 
At 28 February 2015                           25,298    11,493   36,791 
----------------------------------------  ----------  --------  ------- 
Foreign currency translation                      76        34      110 
----------------------------------------  ----------  --------  ------- 
Additions (b)                                    364       493      857 
----------------------------------------  ----------  --------  ------- 
Acquired through business combinations         1,725        17    1,742 
----------------------------------------  ----------  --------  ------- 
Reclassification                                (93)         2     (91) 
----------------------------------------  ----------  --------  ------- 
Classified as held for sale                    (715)      (23)    (738) 
----------------------------------------  ----------  --------  ------- 
Disposals                                      (515)     (346)    (861) 
----------------------------------------  ----------  --------  ------- 
Transfer to disposal group classified 
 as held for sale                            (3,583)   (1,202)  (4,785) 
----------------------------------------  ----------  --------  ------- 
At 27 February 2016                           22,557    10,468   33,025 
----------------------------------------  ----------  --------  ------- 
 
Accumulated depreciation and impairment 
 losses 
----------------------------------------  ----------  --------  ------- 
At 28 February 2015                            8,021     8,330   16,351 
----------------------------------------  ----------  --------  ------- 
Foreign currency translation                      93        49      142 
----------------------------------------  ----------  --------  ------- 
Charge for the year                              318       759    1,077 
----------------------------------------  ----------  --------  ------- 
Impairment losses                                263         -      263 
----------------------------------------  ----------  --------  ------- 
Reversal of impairment losses                  (220)      (25)    (245) 
----------------------------------------  ----------  --------  ------- 
Reclassification                                (28)      (77)    (105) 
----------------------------------------  ----------  --------  ------- 
Classified as held for sale                    (475)      (20)    (495) 
----------------------------------------  ----------  --------  ------- 
Disposals                                      (295)     (281)    (576) 
----------------------------------------  ----------  --------  ------- 
Transfer to disposal group classified 
 as held for sale                              (479)     (808)  (1,287) 
----------------------------------------  ----------  --------  ------- 
At 27 February 2016                            7,198     7,927   15,125 
----------------------------------------  ----------  --------  ------- 
 

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

Commitments for capital expenditure contracted for, but not incurred, at 25 February 2017 were GBP115m (2016: GBP215m), principally relating to store development.

Impairment of property, plant and equipment

The Group has determined that for the purposes of impairment testing, each store is a cash-generating unit. Cash-generating units are tested for impairment if there are indicators of impairment at the balance sheet date. Recoverable amounts for cash-generating units are the higher of fair value less costs of disposal, and value in use.

The key estimates for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimates discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. The discount rates are derived from the Group's post-tax weighted average cost of capital, as adjusted for the specific risks relating to each geographical region and predominately range from 9% to 13% (2016: 9% to 12%). On a post-tax basis, the discount rates predominately range from 7% to 10% (2016: 7% to 9%).

Cash flow projections are based on the Group's three year internal forecasts, the results of which are reviewed by the Board. Estimates of selling prices and direct costs are based on past experience and expectations of future changes in the market. The forecasts are extrapolated to five years based on management's expectations, and beyond five years based on estimated long-term average growth rates. These long-term growth rates are based on inflation forecasts by recognised bodies and range from 1% to 3% (2016: 2% to 6%).

Fair values are determined with regard to the market rent for the stores or for alternative uses with investment yields appropriate to reflect the physical characteristics of the property, location, infrastructure, redevelopment potential and other factors. In some cases, fair values include residual valuations where stores may be viable for redevelopment. The key inputs to the valuation are the potential market rents and yields, both of which are largely based on rentals and yields for similar properties in that location. Fair values for the Group's properties were determined with the assistance of independent, professional valuers where appropriate.

The net carrying value of GBP18,108m (2016: GBP17,900m) above comprises GBP13,338m (2016: GBP13,731m) of unimpaired assets and GBP4,770m (2016: GBP4,169m) of impaired assets. Of the impaired assets, GBP2,196m (2016: GBP1,805m) carrying value was supported by value in use and GBP2,574m (2016: GBP2,364m) was supported by fair value. Due to the individual nature of each property, these fair values are classified as Level 3 within the fair value hierarchy.

The total net impairment reversal of GBP6m includes an impairment loss of GBP106m relating to the Group's decision to sell its Turkish operations. This impairment has been classified as an exceptional item relating to discontinued operations; refer to Note 4 and Note 7 for further details.

The remaining net impairment reversal of GBP112m (GBP279m reversal offset by GBP167m losses) relating to continuing operations largely reflects normal fluctuations expected from store level performance within the continuing challenging economic environment. These losses and reversals have been largely presented net at a country level to reflect the underlying trends in the businesses. The impairment reversal of GBP279m (2016: GBP231m) relates to properties in the UK & ROI of GBP118m (2016: GBP126m) and International of GBP161m (2016: GBP105m), whilst the impairment losses of GBP167m (2016: GBP263m) relate to properties in the UK & ROI of GBP12m (2016: GBP164m) and International of GBP155m (2016: GBP99m).

Of the GBP112m net reversal relating to continuing operations, a GBP134m reversal within exceptional items related to trading stores has been classified as 'Net impairment of non-current assets and onerous lease provisions' included within cost of sales. In addition, a GBP30m charge within exceptional items related to construction in progress and closed stores has been classified as 'Net impairment of non-current assets and onerous lease provisions' included within profits/(losses) arising on property-related items. The remaining GBP8m reversal has not been included within exceptional items as it relates to the ongoing management of the property portfolio.

The prior period net impairment charge of GBP18m included a GBP14m reversal relating to the Turkish operations, which were classified as discontinued in the current financial year. Of the remaining GBP32m impairment charge related to continuing operations, an GBP80m release within exceptional items related to trading stores and online general merchandising hardware, which was classified as 'Net impairment of non-current assets and onerous lease provisions' included within cost of sales. In addition, a GBP90m charge within exceptional items related to construction in progress and closed stores was classified as 'Net impairment of non-current assets and onerous lease provisions' included within profits/(losses) arising on property-related items. An additional GBP34m charge within exceptional items relating to business rationalisation in the UK & ROI was classified as 'Net restructuring and redundancy costs' included within cost of sales. The remaining GBP12m reversal was not included within exceptional items.

The Group has carried out a sensitivity analysis on the impairment tests for its trading stores portfolio. A reasonably possible increase of one percentage point in the post-tax discount rates for each geographic region would increase impairment by GBP278m. A decrease by one percentage point would decrease impairment by GBP243m.

Note 12 Group entities

The Group consists of the ultimate parent company, Tesco PLC, and a number of subsidiaries, joint ventures and associates held directly or indirectly by Tesco PLC.

Subsidiaries

The accounting year ends of the subsidiaries consolidated in these financial statements are on or around 25 February 2017.

Interests in joint ventures and associates

Principal joint ventures and associates

The Group's principal joint ventures and associates are:

 
                                                                       Share 
                                                                   of issued 
                                                                       share 
                                                                    capital, 
                                                                        loan 
                                                                     capital                        Principal 
                                  Nature             Business       and debt             Country      area of 
                         of relationship             activity    secrurities    of incorporation    operation 
---------------------  -----------------  -------------------  -------------  ------------------  ----------- 
 Gain Land Limited             Associate               Retail            20%             British     People's 
                                                                                          Virgin     Republic 
                                                                                         Islands     of China 
                                                                                                       / Hong 
                                                                                                         Kong 
 
 Included in 'UK 
  property joint 
  ventures' 
 BLT Properties                    Joint             Property            50%             England       United 
  Limited(*)                     venture           investment                                         Kingdom 
 The Tesco Coral                   Joint             Property            50%             England       United 
  Limited Partnership            venture           investment                                         Kingdom 
 The Tesco Blue                    Joint             Property            50%             England       United 
  Limited Partnership            venture           investment                                         Kingdom 
 The Tesco Atrato                  Joint             Property            50%             England       United 
  Limited Partnership            venture           investment                                         Kingdom 
 The Tesco Passaic                 Joint             Property            50%             England       United 
  Limited Partnership            venture           investment                                         Kingdom 
 The Tesco Navona                  Joint             Property            50%             England       United 
  Limited Partnership            venture           investment                                         Kingdom 
 The Tesco Sarum                   Joint             Property            50%             England       United 
  Limited Partnership            venture           investment                                         Kingdom 
 The Tesco Dorney                  Joint             Property            50%             England       United 
  Limited Partnership            venture           investment                                         Kingdom 
 The Tesco Property                Joint             Property            50%              Jersey       United 
  (No. 2) Limited                venture           investment                                         Kingdom 
  Partnership 
 
 Included in 'Other 
  joint ventures 
  and associates': 
 Tesco Mobile Limited              Joint   Telecommunications            50%             England       United 
                                 venture                                                              Kingdom 
 Tesco Underwriting                Joint            Financial          49.9%             England       United 
  Limited                        venture             services                                         Kingdom 
 Trent Hypermarket                 Joint               Retail            50%               India        India 
  Limited                        venture 
 Tesco Lotus Retail            Associate             Property            25%            Thailand     Thailand 
  Growth Freehold                                  investment 
  and Leasehold 
  Property Fund 
---------------------  -----------------  -------------------  -------------  ------------------  ----------- 
 

(*) On 6 April 2017, the Group purchased the remaining 50% of equity interest in BLT Properties Limited. Refer to Note 22 for further details.

The accounting period end dates of the joint ventures and associates consolidated in these financial statements range from 31 December 2016 to 25 February 2017. The accounting period end dates for joint ventures differ from those of the Group for commercial reasons and depend upon the requirements of the joint venture partner as well as those of the Group. The accounting period end dates of the associates are different from those of the Group as they depend upon the requirements of the parent companies of those entities.

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

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

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

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

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

-- since the Group's leases are priced at fair value, and any rights embedded in the leases are consistent with market practice, they do not provide the Group with additional control over the joint ventures or infer an obligation by the Group to fund the settlement of liabilities of the joint ventures;

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

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

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

Summarised financial information for joint ventures and associates

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

 
                                               UK property          Gain Land 
                                              joint ventures          Limited 
                                            -----------------  -------------------- 
                                                               12 months  12 months 
                                                                  to Dec     to Dec 
                                                2017     2016       2016       2015 
                                                GBPm     GBPm       GBPm       GBPm 
------------------------------------------  --------  -------  ---------  --------- 
Summarised balance sheet 
------------------------------------------  --------  -------  ---------  --------- 
Non-current assets(a)                          4,060    4,158      4,471      4,712 
------------------------------------------  --------  -------  ---------  --------- 
Current assets (excluding cash and 
 cash equivalents)                                99       58      2,261      2,047 
------------------------------------------  --------  -------  ---------  --------- 
Cash and cash equivalents                         48       38        631        581 
------------------------------------------  --------  -------  ---------  --------- 
Current liabilities(b)                         (301)    (327)    (6,208)    (5,550) 
------------------------------------------  --------  -------  ---------  --------- 
Non-current liabilities(b)                   (4,831)  (4,572)      (169)      (153) 
------------------------------------------  --------  -------  ---------  --------- 
Net (liabilities)/assets                       (925)    (645)        986      1,637 
------------------------------------------  --------  -------  ---------  --------- 
 
Summarised income statement 
------------------------------------------  --------  -------  ---------  --------- 
Revenue                                          292      296      9,081      8,408 
------------------------------------------  --------  -------  ---------  --------- 
Profit/(loss) after tax                            -     (36)      (626)      (341) 
------------------------------------------  --------  -------  ---------  --------- 
 
Reconciliation to carrying amounts: 
------------------------------------------  --------  -------  ---------  --------- 
Opening balance                                    -       49        511        582 
------------------------------------------  --------  -------  ---------  --------- 
Additions/(disposals)                              -     (10)          -          - 
------------------------------------------  --------  -------  ---------  --------- 
Foreign currency translation                       -        -         47        (3) 
------------------------------------------  --------  -------  ---------  --------- 
Share of profits/(losses)(c)                      14       22      (125)       (68) 
------------------------------------------  --------  -------  ---------  --------- 
Dividends received from joint ventures 
 and associates                                 (14)     (29)          -          - 
------------------------------------------  --------  -------  ---------  --------- 
Deferred profits offset against carrying 
 amounts(d)                                        -     (32)          -          - 
------------------------------------------  --------  -------  ---------  --------- 
Closing balance                                    -        -        433        511 
------------------------------------------  --------  -------  ---------  --------- 
 
Group's share in ownership                       50%      50%        20%        20% 
------------------------------------------  --------  -------  ---------  --------- 
Group's share of net assets/(liabilities)      (463)    (323)        197        327 
------------------------------------------  --------  -------  ---------  --------- 
Goodwill                                           -        -        236        184 
------------------------------------------  --------  -------  ---------  --------- 
Deferred property profits offset 
 against carrying amounts(d)                    (63)     (64)          -          - 
------------------------------------------  --------  -------  ---------  --------- 
Cumulative unrecognised losses(e)                175      143          -          - 
------------------------------------------  --------  -------  ---------  --------- 
Cumulative unrecognised hedge reserves(f)        351      244          -          - 
------------------------------------------  --------  -------  ---------  --------- 
Carrying amount                                    -        -        433        511 
------------------------------------------  --------  -------  ---------  --------- 
 

(a) The non-current asset balances of UK property joint ventures are reflected at historic depreciated cost to conform to the Group's accounting policies. The aggregate fair values in the financial statements of the joint ventures are GBP5,242m (2016: GBP5,415m).

(b) The current and non-current liabilities of UK property joint ventures largely comprise loan balances of GBP4,121m (2016: GBP4,151m) and derivative swap balances of GBP703m (2016: GBP487m) entered into to hedge the cash flow variability exposures of the joint ventures. The 2016 derivative balance of GBP487m reflects a GBP159m reduction due to valuation adjustments for credit risk not included in the prior year.

(c) The profit for the year for UK property joint ventures related to GBP14m dividends received from joint ventures with GBPnil carrying amounts GBP21m of losses and GBP107m of decreases in the fair values of derivatives arising from these entities have been included in cumulative unrecognised losses and cumulative unrecognised hedge reserves respectively. The loss of GBP(125)m for Gain Land Limited includes an impairment loss of GBP(54)m treated as an exceptional item. Refer to Note 4.

(d) Deferred profits that arose from the transfer of properties into the UK property joint ventures have been offset against the carrying amounts of the related joint ventures. GBP1m relating to The Brookmaker Limited Partnership has been released during the year as a result of the disposal.

(e) Cumulative unrecognised losses of GBP3m were disposed of relating to The Brookmaker Limited Partnership.

(f) The 2016 cumulative unrecognised hedge reserves balances have been reduced by GBP79m to reflect valuation adjustments for credit risks.

At 25 February 2017, the Group has GBP103m (2016: GBP115m) loans to UK property joint ventures and GBPnil (2016: GBPnil) to Gain Land Limited.

Other joint ventures and associates

The Group also has interests in a number of other joint ventures and associates, excluding UK Property joint ventures and Gain Land Limited. These are not considered to be individually material to the Group.

 
                                      Joint ventures    Associates 
                                     ----------------  ------------ 
                                        2017     2016   2017   2016 
                                        GBPm     GBPm   GBPm   GBPm 
-----------------------------------  -------  -------  -----  ----- 
Aggregate carrying amount of other 
 joint ventures and associates           245      219     61     55 
-----------------------------------  -------  -------  -----  ----- 
Group's share of profits/(losses) 
 for the year                            (7)       23     11      2 
-----------------------------------  -------  -------  -----  ----- 
 

Impairment

Management has performed impairment tests and sensitivity analysis on its investments in Gain Land Limited, Trent Hypermarket Limited and Tesco Underwriting Limited. The carrying values of Trent Hypermarket Limited of GBP112m (2016: GBP96m) and Tesco Underwriting Limited of GBP71m (2016: GBP76m) are included within 'Other joint ventures and associates' as discussed above.

The recoverable values of these investments were estimated taking into account forecast cash flows, equity valuations of comparable entities and/or recent transactions for comparable businesses. No impairment was recognised in the period for these investments. Sensitivity tests for reasonably possible increases in the discount rates of one percentage point would not indicate impairment in any of the investment.

Future changes in estimated cash flows, discount rates, competitive landscape, retail market conditions and other factors may result in impairment losses or reversals of impairment in future periods.

Note 13 Cash and cash equivalents and short-term investments

 
 
 Cash and cash equivalents    2017   2016 
                              GBPm   GBPm 
---------------------------  -----  ----- 
Cash at bank and in hand     3,498  2,334 
---------------------------  -----  ----- 
Short-term deposits            323    748 
---------------------------  -----  ----- 
                             3,821  3,082 
---------------------------  -----  ----- 
 
 
 
 Short-term investments    2017   2016 
                           GBPm   GBPm 
------------------------  -----  ----- 
Money market funds        2,727  3,463 
------------------------  -----  ----- 
 

Included in cash and cash equivalents is an amount of GBP777m that has been set aside for completion of the merger with Booker Group Plc. This cash is not available to the Group and must be held in ring-fenced accounts until released jointly by the Group and its advisors on satisfaction of the completion terms of the merger as set out in the offering circular dated 27 January 2017. Until that time, or if the merger is not completed, it remains an asset of the Group. At the balance sheet date it was invested with a single financial institution at a floating rate of interest. Interest accrues and is payable to the Group.

Note 14 Commercial income

Consistent with standard industry practice, the Group has agreements with suppliers whereby volume-related allowances, promotional and marketing allowances and various other fees and discounts are received in connection with the purchase of goods for resale from those suppliers. Most of the income received from suppliers relates to adjustments to a core cost price of a product, and as such is considered part of the purchase price for that product. Sometimes receipt of the income is conditional on the Group performing specified actions or satisfying certain performance conditions associated with the purchase of the product. These include achieving agreed purchases or sales volume targets and providing promotional or marketing materials and activities or promotional product positioning. Whilst there is no standard industry definition, these amounts receivable from suppliers in connection with the purchase of goods for resale are generally termed commercial income.

Commercial income is recognised when earned by the Group, which occurs when all obligations conditional for earning income have been discharged, and the income can be measured reliably based on the terms of the contract. The income is recognised as a credit within cost of sales. Where the income earned relates to inventories which are held by the Group at period ends, the income is included within the cost of those inventories, and recognised in cost of sales upon sale of those inventories.

Amounts due relating to commercial income are recognised within trade and other receivables, except in cases where the Group currently has a legally enforceable right of set-off and intends to offset amounts due from suppliers against amounts owed to those suppliers, in which case only the net amount receivable or payable is recognised. Accrued commercial income is recognised within accrued income when commercial income earned has not been invoiced at the balance sheet date.

Management consider the best indicator of the estimation undertaken is by reference to commercial income balances not settled at the balance sheet date and has therefore provided additional disclosures of commercial income amounts reflected in the balance sheet.

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

 
                                  2017    2016 
                                  GBPm    GBPm 
------------------------------  ------  ------ 
 Current assets 
------------------------------  ------  ------ 
 Inventories                      (75)    (75) 
------------------------------  ------  ------ 
 Trade and other receivables 
------------------------------  ------  ------ 
 Trade/other receivables           215     201 
------------------------------  ------  ------ 
 Accrued income                    150     100 
------------------------------  ------  ------ 
 
 Current liabilities 
------------------------------  ------  ------ 
 Trade and other payables 
------------------------------  ------  ------ 
 Trade payables                    213     305 
------------------------------  ------  ------ 
 Accruals and deferred income     (22)    (43) 
------------------------------  ------  ------ 
 

The 27 February 2016 accruals and deferred income disclosure, previously disclosed in Note 13 of the 2015/16 Preliminary Results, included amounts that were unrelated to commercial income and has therefore been amended accordingly.

Note 15 Borrowings

 
                                                    2017   2016 
Current                       Par value  Maturity   GBPm   GBPm 
----------------------------  ---------  --------  -----  ----- 
Bank loans and overdrafts             -         -    912    845 
----------------------------  ---------  --------  -----  ----- 
Loans from joint ventures             -         -      6      6 
----------------------------  ---------  --------  -----  ----- 
4% RPI MTN                      GBP310m  Sep 2016      -    316 
----------------------------  ---------  --------  -----  ----- 
5.875% MTN                    EUR1,039m  Sep 2016      -    877 
----------------------------  ---------  --------  -----  ----- 
2.7% USD Bond                     $500m  Jan 2017      -    361 
----------------------------  ---------  --------  -----  ----- 
5.4478% Term Loan               GBP382m  Jan 2017      -    396 
----------------------------  ---------  --------  -----  ----- 
LIBOR + 0.5% Term Loan          GBP488m  Oct 2017    484      - 
----------------------------  ---------  --------  -----  ----- 
1.250% MTN                      EUR500m  Nov 2017    423      - 
----------------------------  ---------  --------  -----  ----- 
5.5% USD Bond                     $850m  Nov 2017    709      - 
----------------------------  ---------  --------  -----  ----- 
5.5457% Secured Bond (a)(b)     GBP366m  Feb 2029     15     14 
----------------------------  ---------  --------  -----  ----- 
Finance leases                        -         -     11     11 
----------------------------  ---------  --------  -----  ----- 
                                                   2,560  2,826 
----------------------------  ---------  --------  -----  ----- 
 

(a)-(b) Refer to the next page for footnotes.

Non-current

 
                                          Par             2017    2016 
                                        value  Maturity   GBPm    GBPm 
----------------------------------  ---------  --------  -----  ------ 
                                                    Oct 
LIBOR +0.5% Term Loan                 GBP488m      2017      -     478 
----------------------------------  ---------  --------  -----  ------ 
                                                    Nov 
1.250% MTN                            EUR500m      2017      -     394 
----------------------------------  ---------  --------  -----  ------ 
                                                    Nov 
5.5% USD Bond                           $850m      2017      -     666 
----------------------------------  ---------  --------  -----  ------ 
                                                    Aug 
5.2% Tesco Bank Retail Bond           GBP125m      2018    129     132 
----------------------------------  ---------  --------  -----  ------ 
                                                    Nov 
3.375% MTN                            EUR750m      2018    641     595 
----------------------------------  ---------  --------  -----  ------ 
                                                    May 
LIBOR + 0.45% Tesco Bank Bond         GBP150m      2019    150     150 
----------------------------------  ---------  --------  -----  ------ 
                                                    Jul 
1.375% MTN                          EUR1,250m      2019  1,063     990 
----------------------------------  ---------  --------  -----  ------ 
                                                    Dec 
5.5% MTN                              GBP350m      2019    353     353 
----------------------------------  ---------  --------  -----  ------ 
                                                    Dec 
1% RPI Tesco Bank Retail Bond(c)       GBP67m      2019     67      66 
----------------------------------  ---------  --------  -----  ------ 
                                                    Apr 
 LIBOR + 0.65% Tesco Bank Bond        GBP300m      2020    299     299 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Nov 
 2.125% MTN                           EUR500m      2020    423     394 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Nov 
 5% Tesco Bank Retail Bond            GBP200m      2020    210     211 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    May 
 LIBOR + 0.65% Tesco Bank Bond        GBP350m      2021    349     349 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Feb 
 6.125% MTN                           GBP900m      2022    896     896 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Mar 
 5% MTN                               GBP389m      2023    411     411 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Jul 
 2.5% MTN                             EUR750m      2024    640     595 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Nov 
 3.322% LPI MTN(d)                    GBP323m      2025    326     320 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Feb 
 5.5457% Secured Bond(a)(b)           GBP366m      2029    339     353 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Feb 
 6.067% Secured Bond(a)               GBP200m      2029    190     189 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Feb 
 LIBOR + 1.2% Secured Bond(a)          GBP50m      2029     31      30 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Dec 
 6% MTN                               GBP200m      2029    253     257 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Jan 
 5.5% MTN                             GBP200m      2033    255     259 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Mar 
 1.982% RPI MTN(e)                    GBP268m      2036    270     265 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Nov 
 6.15% USD Bond                       $1,150m      2037  1,063   1,035 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Mar 
 4.875% MTN                           GBP173m      2042    175     175 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Apr 
 5.125% MTN                           EUR600m      2047    522     486 
 ---------------------------------  ---------  --------  -----  ------ 
                                                    Mar 
 5.2% MTN                             GBP279m      2057    275     275 
 ---------------------------------  ---------  --------  -----  ------ 
 Finance leases                             -         -    103      88 
 ---------------------------------  ---------  --------  -----  ------ 
                                                         9,433  10,711 
 ---------------------------------  ---------  --------  -----  ------ 
 
 

(a) The bonds are secured by a charge over the property, plant and equipment held within the Tesco Property Limited Partnership, a 100% owned subsidiary of Tesco PLC. The carrying amounts of assets pledged as security for secured bonds is GBP788m (2016: GBP838m).

(b) This is an amortising bond which matures in February 2029. GBP15m (2016: GBP14m) is the principal repayment due within the next 12 months. The remainder is payable in quarterly instalments until maturity in February 2029.

(c) The 1% RPI Tesco Bank Retail Bond is redeemable at par, indexed for increases in the RPI over the life of the bond.

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

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

Borrowing facilities

The Group has the following undrawn committed facilities available at 25 February 2017, in respect of which all conditions precedent had been met as at that date:

 
                                      2017   2016 
                                      GBPm   GBPm 
-----------------------------------  -----  ----- 
Expiring in less than one year           -    100 
-----------------------------------  -----  ----- 
Expiring between one and two years       -  2,200 
-----------------------------------  -----  ----- 
Expiring in more than two years      4,427  2,700 
-----------------------------------  -----  ----- 
                                     4,427  5,000 
-----------------------------------  -----  ----- 
 

The current year undrawn committed facilities include GBP1.8bn (2016: GBP2.4bn) of bilateral facilities and a GBP2.6bn (2016: GBP2.6bn) syndicated revolving credit facility. During the year, GBP1.8bn equivalent of bilateral facilities were refinanced in a tenor of three years to a final maturity of August 2019.

All facilities incur commitment fees at market rates and would provide funding at floating rates.

Note 16 Provisions

 
                                  Property  Restructuring        Other 
                                provisions     provisions   provisions  Total 
                                      GBPm           GBPm         GBPm   GBPm 
-----------------------------  -----------  -------------  -----------  ----- 
At 28 February 2015                    941            325          100  1,366 
-----------------------------  -----------  -------------  -----------  ----- 
Foreign currency translation           (1)              4            -      3 
-----------------------------  -----------  -------------  -----------  ----- 
Amount released in the year            (4)           (77)            -   (81) 
-----------------------------  -----------  -------------  -----------  ----- 
Amount provided in the year            154            166            -    320 
-----------------------------  -----------  -------------  -----------  ----- 
Amount utilised in the year          (188)          (335)         (34)  (557) 
-----------------------------  -----------  -------------  -----------  ----- 
Transfer to disposal group 
 classified as held for sale          (74)              -            -   (74) 
-----------------------------  -----------  -------------  -----------  ----- 
Unwinding of discount                   47              -            -     47 
-----------------------------  -----------  -------------  -----------  ----- 
At 27 February 2016                    875             83           66  1,024 
-----------------------------  -----------  -------------  -----------  ----- 
Foreign currency translation            12              4            -     16 
-----------------------------  -----------  -------------  -----------  ----- 
Amount released in the year           (38)           (18)            -   (56) 
-----------------------------  -----------  -------------  -----------  ----- 
Amount provided in the year             99            196          136    431 
-----------------------------  -----------  -------------  -----------  ----- 
Amount utilised in the year          (141)          (162)         (28)  (331) 
-----------------------------  -----------  -------------  -----------  ----- 
Transfer to disposal group 
 classified as held for sale             -            (5)            -    (5) 
-----------------------------  -----------  -------------  -----------  ----- 
Unwinding of discount                   44              -            -     44 
-----------------------------  -----------  -------------  -----------  ----- 
At 25 February 2017                    851             98          174  1,123 
-----------------------------  -----------  -------------  -----------  ----- 
 

The balances are analysed as follows:

 
               2017   2016 
               GBPm   GBPm 
------------  -----  ----- 
Current         438    360 
------------  -----  ----- 
Non-current     685    664 
------------  -----  ----- 
              1,123  1,024 
------------  -----  ----- 
 

Property provisions

Property provisions comprise onerous lease provisions, including leases on unprofitable stores and vacant properties, dilapidations provisions and asset retirement obligation provisions. These provisions are based on the least net cost of fulfilling or exiting the contract.

The calculation of the value in use of the leased properties to the Group is based on the same assumptions for growth rates and expected change in margins as those for Group owned properties, as discussed in detail in Note 11, discounted at the appropriate risk free rate. The cost of exiting lease contracts is estimated as the present value of expected surrender premiums or deficits from subletting at market rents, assuming that the Group can sublet properties at market rents, based on discounting at the appropriate risk adjusted rate. For some leases, termination of the lease at the break clause requires the Group to either purchase the property or buy out the equity ownership of the property at fair value. No value is attributed to the purchase conditions since they are at fair value. It is also assumed that the Group is indifferent to purchasing the properties.

Based on the factors set out above, the Group has recognised a net onerous property provision charge in the year of GBP61m (2016: GBP150m), largely relating to onerous lease contracts for fully impaired properties and other onerous contracts relating to properties. The Group has performed sensitivity analysis on the onerous lease provisions. A reasonably possible increase of one percentage point in the risk-free rate would reduce the provision by GBP43m. A decrease of one percentage point would increase the provision by GBP50m.

Of the net onerous property provision charge, a GBP76m charge (2016: GBP151m) has been recognised as an exceptional item; GBP56m in cost of sales and GBP20m in property-related items. This is made up of GBP56m classified as 'Net impairment of non-current assets and onerous lease provisions' and GBP20m classified as 'Net restructuring and redundancy costs'.

Onerous lease provisions will be utilised over the relevant lease terms, predominantly within the next 25 years.

Restructuring provisions

Of the GBP178m net charge (GBP196m charge, GBP18m release) recognised in the year, GBP135m relating to ongoing UK & ROI changes to the distribution network and to store colleague structures and working practices has been classified as an exceptional item. Refer to Note 4 for further details. The exceptional charges are expected to be utilised in the next financial year.

Other provisions

On 10 April 2017, the Group announced that its subsidiary, Tesco Stores Limited, had obtained Court approval and entered into a Deferred Prosecution Agreement (DPA) with the UK Serious Fraud Office (SFO) regarding historic accounting practices. On 28 March 2017, the Group also announced that it had agreed with the UK Financial Conduct Authority (FCA) to a finding of market abuse in relation to its trading statement announced on 29 August 2014. In making its finding, the FCA has expressly stated that it is not suggesting that the Tesco PLC Board of Directors knew, or could reasonably be expected to have known, that the information contained in that trading statement was false or misleading. The Group has agreed with the FCA (under its statutory powers) to establish a compensation scheme which will compensate certain net purchasers of Tesco ordinary shares and listed bonds between 29 August 2014 and 19 September 2014 inclusive. The Group has taken a total exceptional charge of GBP235m in respect of the DPA of GBP129m, the expected costs of the compensation scheme of GBP85m, and related costs. This has been recorded in the financial statements in the year to 25 February 2017 as an adjusting post balance sheet event.

Of the GBP235m, GBP91m is included in other current provisions to cover the cost of the compensation scheme and related costs. The remaining GBP144m has been recorded within accruals. These charges have been classified as an exceptional item within administrative expenses.

Other current provisions also include provisions for Tesco Bank customer redress in respect of potential complaints arising from the historic sales of Payment Protection Insurance (PPI), and in respect of customer redress relating to instances where certain of the requirements of the Consumer Credit Act (CCA) for post contract documentation have not been fully complied with. In each instance, management have exercised judgement as to both the timescale for implementing the redress campaigns and the final scope of any amounts payable. A charge of GBP45m has been recognised in the year as an exceptional item in cost of sales. Refer to Note 4 for further details.

Note 17 Post-employment benefits

Pensions

The Group operates a variety of post-employment benefit arrangements, covering both funded and unfunded defined benefit schemes and funded defined contribution schemes. The most significant of these are the funded defined benefit pension schemes for the Group's employees in the UK (now closed to future accrual) and the Republic of Ireland, and the funded defined contribution pension scheme for employees in the UK. Of these schemes, the UK defined benefit deficit represents 98% of the Group deficit (2016: 94%).

The principal plan within the Group is the Tesco PLC Pension Scheme (the 'Scheme'), which is a funded defined benefit pension scheme in the UK, the assets of which are held as a segregated fund and administered by the Trustee.

The Career Average section of the Scheme ('Pension Builder') was closed to new members and future accrual on 21 November 2015. The Final Salary section of the Scheme, which was closed to new entrants in 2001, was also closed to future accrual on 21 November 2015. As a result of this closure a one off past service credit of GBP538m and other associated costs of GBP(58)m were recognised as exceptional items in the prior year. Refer to Note 4.

A defined contribution scheme, Tesco Retirement Savings Plan, was opened on 22 November 2015 and is open to all Tesco employees in the UK.

At 31 March 2014, the deficit valuation arising from the triennial actuarial assessment was GBP2.8bn. A plan to pay GBP270m a year was agreed with the Trustee to fund the UK pension deficit and to meet the expenses of the scheme. The expenses of the scheme were GBP22m (2016: GBP27m).

The next triennial actuarial valuation is effective as at 31 March 2017 and work is already underway. The Trustee is aiming to conclude the valuation as soon as is reasonably possible.

UK Principal assumptions

The major assumptions, on a weighted average basis, used by the actuaries to value the defined benefit obligation as at 25 February 2017 were as follows:

 
                                             2017  2016 
                                                %     % 
-------------------------------------------  ----  ---- 
Discount rate                                 2.5   3.8 
-------------------------------------------  ----  ---- 
Price inflation                               3.2   2.9 
-------------------------------------------  ----  ---- 
Rate of increase in deferred pensions(*)      2.2   1.9 
-------------------------------------------  ----  ---- 
Rate of increase in pensions in payment(*) 
-------------------------------------------  ----  ---- 
  Benefits accrued before 1 June 2012         3.0   2.7 
-------------------------------------------  ----  ---- 
  Benefits accrued after 1 June 2012          2.2   1.9 
-------------------------------------------  ----  ---- 
 

(*) In excess of any Guaranteed Minimum Pension ('GMP') element.

The main financial assumption is the discount rate. If the discount rate increased by 0.1% or 1.0%, the UK defined benefit obligation would decrease by approximately GBP526m or GBP4,536m respectively. If this assumption decreased by 0.1% or 1.0%, the UK defined benefit obligation would increase by approximately GBP545m or GBP6,541m respectively.

Summary of movements in Group deficit during the financial year

Changes in the Group deficit, including movements of discontinued operations up to classification as held for sale, are as follows:

 
                                                   2017     2016 
                                                   GBPm     GBPm 
----------------------------------------------  -------  ------- 
Deficit in schemes at beginning of the year     (3,175)  (4,842) 
----------------------------------------------  -------  ------- 
Current service cost                               (35)    (570) 
----------------------------------------------  -------  ------- 
Past service credit                                   -      535 
----------------------------------------------  -------  ------- 
Net pension finance cost(a)                       (113)    (155) 
----------------------------------------------  -------  ------- 
Contributions by employer(b)                         28      433 
----------------------------------------------  -------  ------- 
Additional contributions by employer                248      223 
----------------------------------------------  -------  ------- 
Foreign currency translation                       (12)      (8) 
----------------------------------------------  -------  ------- 
Remeasurements                                  (3,567)    1,164 
----------------------------------------------  -------  ------- 
Transfer to disposal group classified as held 
 for sale                                             5       45 
----------------------------------------------  -------  ------- 
Deficit in schemes at the end of the year       (6,621)  (3,175) 
----------------------------------------------  -------  ------- 
Deferred tax asset                                1,122      563 
----------------------------------------------  -------  ------- 
Deficit in schemes at the end of the year, 
 net of deferred tax                            (5,499)  (2,612) 
----------------------------------------------  -------  ------- 
 

(a) Includes GBPnil (2016: GBPnil) discontinued operations up to reclassification as held for sale.

(b) Contributions by employer include GBPnil (2016: GBP125m) of salaries paid as pension contributions.

Note 18 Analysis of changes in net debt

 
                                                                                Reclassifications 
                                                                                     of movements 
                                            Fair value                                     in net 
                               At          and foreign    Interest       Other            debt of            At 
                      27 February   Cash      exchange   (charge)/    non-cash       the disposal   25 February 
                             2016   flow     movements      income   movements              group          2017 
                             GBPm   GBPm          GBPm        GBPm        GBPm               GBPm          GBPm 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Total Group 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Cash and cash 
 equivalents                3,082    881         (131)           -           -               (11)         3,821 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Short-term 
 investments                3,463  (736)             -           -           -                  -         2,727 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Joint venture 
 loans                        149   (15)             -           -           3                  -           137 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Interest and 
 other receivables              1   (25)             -          25           -                  -             1 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Bank and other 
 borrowings              (13,253)  1,851         (372)        (21)          10                 73      (11,712) 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Interest payables           (185)    522          (18)       (479)        (10)                  3         (167) 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Finance lease 
 payables                    (99)     12           (6)           -        (21)                  -         (114) 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Net derivative 
 financial 
 instruments                  698  (475)           655          15           -                  -           893 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Net derivative 
 interest                      59   (16)             -        (15)           -                  -            28 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Net debt of 
 the disposal 
 group                          -      -             -           -           -               (65)          (65) 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Total Group               (6,085)  1,999           128       (475)        (18)                  -       (4,451) 
-------------------  ------------  -----                            ---------- 
Tesco Bank 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Cash and cash 
 equivalents                  554    235             -           -           -                  -           789 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Joint ventures 
 loans                         34      -             -           -           -                  -            34 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Bank and other 
 borrowings               (1,441)      -             1           -           -                  -       (1,440) 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Interest payables             (1)      4             -         (3)           -                  -             - 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Net derivative 
 financial 
 instruments                (121)      -            16           -           -                  -         (105) 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Tesco Bank                  (975)    239            17         (3)           -                  -         (722) 
-------------------  ------------  -----                            ---------- 
Retail 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Cash and cash 
 equivalents                2,528    646         (131)           -           -               (11)         3,032 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Short-term 
 investments                3,463  (736)             -           -           -                  -         2,727 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Joint ventures 
 loans                        115   (15)             -           -           3                  -           103 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Interest and 
 other receivables              1   (25)             -          25           -                  -             1 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Bank and other 
 borrowings              (11,812)  1,851         (373)        (21)          10                 73      (10,272) 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Interest payables           (184)    518          (18)       (476)        (10)                  3         (167) 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Finance lease 
 payables                    (99)     12           (6)           -        (21)                  -         (114) 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Net derivative 
 financial 
 instruments                  819  (475)           639          15           -                  -           998 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Net derivative 
 interest                      59   (16)             -        (15)           -                  -            28 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Net debt of 
 the disposal 
 group                          -      -             -           -           -               (65)          (65) 
-------------------  ------------  -----  ------------  ----------  ----------  -----------------  ------------ 
Net debt                  (5,110)  1,760           111       (472)        (18)                  -       (3,729) 
-------------------  ------------  -----                            ---------- 
 

Net debt excludes the net debt of Tesco Bank but includes that of discontinued operations. Balances and movements in respect of the total Group and Tesco Bank are presented to allow reconciliation between the Group balance sheet and the Group cash flow statement.

Reconciliation of net cash flow to movement in Net debt

 
                                                                     2017     2016 
                                                                     GBPm     GBPm 
Net increase/(decrease) in cash and cash equivalents                  881      907 
Elimination of Tesco Bank movement in cash and cash equivalents     (235)       62 
Retail cash movement in other Net debt items 
  Net increase/(decrease) in short-term investments                 (736)    2,894 
  Net increase/(decrease) in joint venture loans                     (15)        1 
  Net (increase)/decrease in borrowings and lease financing         1,863    1,059 
  Net cash flows from derivative financial instruments              (475)    (154) 
  Net interest paid on components of net debt                         477      419 
Change in Net debt resulting from cash flow                         1,760    5,188 
 
Retail net interest charge on components of net debt                (472)    (447) 
Retail fair value and foreign exchange movements                      111      113 
Debt disposed on disposal of Korean operations                          -       97 
Debt acquired on business combinations                                  -  (1,545) 
Retail other non-cash movements                                      (18)     (35) 
(Increase)/decrease in Net debt for the year                        1,381    3,371 
 
Opening Net debt                                                  (5,110)  (8,481) 
Closing Net debt                                                  (3,729)  (5,110) 
 

Note 19 Business combinations and disposals

Business combinations

The Group has paid GBP25m of deferred consideration in the year, related to its obligations under the purchase agreements for the acquisitions of Sociomantic Labs and Bzz Agent Limited from prior years.

Disposals

During the year, the Group sold its interests in Dobbies Garden Centres, Giraffe and Harris + Hoole and closed its Nutricentre business, further enhancing the focus of the UK retail business on its core strengths. The Group received GBP213m in cash, net of cash disposed, and recognised GBP1m in deferred consideration. Of the net cash received, GBP192m related to the sale of Dobbies Garden Centres. In total, the Group disposed of net assets of GBP243m and incurred costs to sell of GBP15m, GBP8m of which had been paid as at the year end.

In addition, the Group disposed of a 6.9% interest (on a fully diluted basis) in Lazada Group S.A. (Lazada) for net cash consideration of US$115m (GBP81m), retaining an 8.8% shareholding.

The total loss on these transactions amounted to GBP7m, which is included within operating profit before exceptional items.

On 10 June 2016, the Group announced the proposed sale of its 95.5% controlling interest in its Turkish operations to Migros. The assets and liabilities related to the Turkish operations have been classified as a disposal group held for sale during the year and are presented within discontinued operations. Local regulatory approvals were obtained on 9 February 2017 and the sale completed on 1 March 2017. Refer to Note 7 and 22 for further information.

Note 20 Contingent liabilities

There are a number of contingent liabilities that arise in the normal course of business which if realised are not expected to result in a material liability to the Group. The Group recognises provisions for liabilities when it is more likely than not that a settlement will be required and the value of such a payment can be reliably estimated.

As previously reported, law firms in the UK have announced the intention of forming claimant groups to commence litigation against the Group for matters arising out of or in connection with its overstatement of expected profits in 2014, and purport to have secured third party funding for such litigation. In this regard, the Group has received two High Court claims against Tesco PLC. The first was received on 31 October 2016 from a group of 112 investors and the second was received on 5 December 2016 from an investment company and a trust company. The merit, likely outcome and potential impact on the Group of any such litigation that either has been or might potentially be brought against the Group is subject to a number of significant uncertainties and therefore, the Group cannot make any assessment of the likely outcome or quantum of any such litigation as at the date of this disclosure.

Prior to the disposal of its Korean operations (Homeplus), Tesco PLC provided guarantees in respect of 13 Homeplus lease agreements in Korea in the event of termination of the relevant lease agreement by the landlord due to Homeplus' default. Entities controlled by MBK and CPPIB, as the purchasers of Homeplus, undertook to procure Tesco PLC's release from these guarantees following the disposal of Homeplus, which currently remains outstanding. This liability decreases over time with all relevant leases expiring in the period between 2026 and 2033. Tesco PLC has the benefit of an indemnity from the purchasers of Homeplus for any claims made under such guarantees. The maximum potential liability under the lease guarantees as at 25 February 2017 is KRW575bn (GBP407m).

Note 21 Lease commitments

Operating lease commitments - Group as lessee

Future minimum lease commitments under non-cancellable operating leases are as follows:

 
                                                   2017    2016 
                                                   GBPm    GBPm 
Within one year                                   1,199   1,296 
Greater than one year but less than five years    3,767   3,918 
After five years                                  7,395   7,831 
Total minimum lease commitments                  12,361  13,045 
 

Future minimum lease commitments under non-cancellable operating leases after five years are analysed further as follows:

 
                                                      2017   2016 
                                                      GBPm   GBPm 
Greater than five years but less than ten years      3,161  3,272 
Greater than ten years but less than fifteen years   2,225  2,303 
After fifteen years                                  2,009  2,256 
Total minimum lease commitments - after five years   7,395  7,831 
 

The Group has used operating lease commitments discounted at 7% (2016: 7%) of GBP7,440m (2016: GBP7,814m) in its calculation of total indebtedness. Total operating lease commitments in Turkey of GBP27m were included in 2016. The discounted operating lease commitment included in total indebtedness is not an appropriate proxy for the expected impact of recognising a lease liability under IFRS 16 'Leases', primarily due to differences in the discount rates used and the treatment of additional lease rentals arising from contracts that contain extend or buy conditions, amongst other differences.

Operating lease commitments represent rentals payable by the Group for certain of its 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.

The Group has lease-break options on certain sale and leaseback transactions. These options are exercisable if the Group exercises an existing option to buy back, at market value and at a specified date, either the leased asset or the equity of the other joint venture partner. No commitment has been included in respect of the buy-back option as the option is at the Group's discretion. The Group is not obliged to pay lease rentals after that date, therefore minimum lease commitments exclude those falling after the buy-back date. The current market value of these properties is GBP2.9bn (2016: GBP3.2bn) and the total undiscounted lease rentals, if they were to be incurred following the option exercise date, would be GBP2.6bn (2016: GBP2.6bn) using current rent values, as shown below.

The additional lease rentals if incurred following the option exercise date would be as follows:

 
                                                              2017   2016 
                                                              GBPm   GBPm 
Within one year                                                 23     45 
Greater than one year but less than five years                 170     72 
Greater than five years but less than ten years                709    686 
Greater than ten years but less than fifteen years             670    718 
After fifteen years                                          1,019  1,115 
Total undiscounted contingent additional lease rentals       2,591  2,636 
Total discounted contingent additional lease rentals at 7%   1,107  1,111 
 

The lease break options are exercisable between 2017 and 2023.

Operating lease commitments with joint ventures and associates

In prior years, the Group entered into several joint ventures and associates, and sold and leased back properties to and from these joint ventures and associates. The terms of these sale and leasebacks varied. However, common factors included: the sale of the properties to the joint venture or associate at market value; options within the lease for the Group to repurchase the properties at market value; market rent reviews; and 20 to 30 full-year lease terms. The Group reviews the substance as well as the form of the arrangements when determining the classification of leases as operating or finance. All of the leases under these arrangements are operating leases.

Note 22 Events after the reporting period

On 1 March 2017, the Group announced the completion of the disposal of its 95.5% controlling stake in the Kipa business in Turkey following the receipt of all local regulatory approvals.

On 10 April 2017, the Group announced that its subsidiary, Tesco Stores Limited, had obtained Court approval and entered into a Deferred Prosecution Agreement (DPA) with the UK Serious Fraud Office (SFO) regarding historic accounting practices. On 28 March 2017, the Group also announced that it had agreed with the UK Financial Conduct Authority (FCA) to a finding of market abuse in relation to its trading statement announced on 29 August 2014. In making its finding, the FCA has expressly stated that it is not suggesting that the Tesco PLC Board of Directors knew, or could reasonably be expected to have known, that the information contained in that trading statement was false or misleading. The Group has agreed with the FCA (under its statutory powers) to establish a compensation scheme which will compensate certain net purchasers of Tesco ordinary shares and listed bonds between 29 August 2014 and 19 September 2014 inclusive. The Group has taken a total exceptional charge of GBP235m in respect of the DPA of GBP129m, the expected costs of the compensation scheme of GBP85m, and related costs. This has been recorded in the financial statements in the year to 25 February 2017 as an adjusting post balance sheet event.

On 6 April 2017, the Group unwound its joint venture with British Land Co PLC (British Land). The Group obtained sole control of BLT Properties Limited through the acquisition of British Land's 50% interest in the joint venture. The acquisition increased the Group's owned property portfolio by GBP0.2bn, comprising seven stores. British Land obtained sole control of one store and one retail centre, previously held in the joint venture.

Note 23 Proposed Booker Group transaction

On 27 January 2017, the Group announced that it had reached an agreement on the terms of a recommended share and cash merger with Booker Group Plc. The transaction is subject to shareholder and regulatory approvals.

Glossary - Alternative performance measures

Introduction

In the reporting of financial information, the Directors have adopted various Alternative Performance Measures (APMs), previously termed 'Non-GAAP measures' of historical or future financial performance, position or cash flows other than those defined or specified under International Financial Reporting Standards (IFRS).

These measures are not defined by IFRS and therefore may not be directly comparable with other companies' APMs, including those in the Group's industry.

APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements.

Purpose

The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the Group.

APMs are also used to enhance the comparability of information between reporting periods and geographical units (such as like-for-like sales), by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid the user in understanding the Group's performance.

Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive setting purposes and have remained consistent with prior year.

The key APMs that the Group has focused on this year are as follows:

-- Group sales (previously termed Revenue exc. fuel): This is the headline measure of revenue for the Group. It excludes the impact of sales made at petrol filling stations due to the significant volatility of fuel prices. This volatility is outside the control of management and can mask underlying changes in performance.

-- Like-for-like sales: This is a widely used indicator of a retailer's current trading performance. It is a measure of growth in Group online sales and sales from stores that have been open for at least a year (but excludes prior year sales of stores closed during the year) at constant foreign exchange rates.

-- Operating profit before exceptional items: This is the headline measure of the Group's performance, and is based on operating profit before the impact of exceptional items. Exceptional items relate to certain costs or incomes that derive from events or transactions that fall within the normal activities of the Group but which, individually or, if of a similar type, in aggregate, are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group.

-- Retail operating cash flow: This is the operating cash flow of continuing operations, excluding the effects of Tesco Bank's cash flows.

-- Net debt: This excludes the net debt of Tesco Bank but includes that of the discontinued operations to reflect the net debt obligations of the Retail business.

-- Diluted earnings per share from continuing operations before exceptional items and net pension finance costs: This relates to profit after tax before exceptional items from continuing operations, and net pension finance costs attributable to owners of the parent divided by the weighted average number of ordinary shares in issue during the financial period adjusted for the effects of potentially dilutive options.

Some of our IFRS measures are translated at constant exchange rates. Constant exchange rates are the average actual periodic exchange rates for the previous financial year and are used to eliminate the effects of exchange rate fluctuations in assessing performance. Actual exchange rates are the average actual periodic exchange rates for that financial year.

 
APM            Closest     Adjustments to reconcile                  Note reference  Definition and purpose 
               equivalent   to IFRS measure                          for 
               IFRS                                                  reconciliation 
               measure 
Income 
statement 
Revenue 
measures 
Group sales    Revenue                                               Note 2 
                                *    Exclude sales made at petrol                      *    Excludes the impact of sales made at petrol filling 
                                                                                            stations to demonstrate the Group's underlying 
                                                                                            performance in the core retail and financial services 
                               filling stations                                             businesses by removing the volatilities associated 
                                                                                            with the movement in fuel prices. This is a key 
                                                                                            management incentive metric. 
Growth in      No direct                                             Not applicable 
sales          equivalent    *    Consistent with accounting policy                    *    Growth in sales is a ratio that measures year on-year 
                                                                                            movement in Group sales for continuing operations for 
                                                                                            52 weeks. It shows the annual rate of increase in the 
                                                                                            Group's sales and is considered a good indicator of 
                                                                                            how rapidly the Group's core business is growing. 
Like-for-like  No direct                                             Not applicable 
               equivalent    *    Consistent with accounting policy                     *    Like-for-like is a measure of growth in Group online 
                                                                                             sales and sales from stores that have been open for 
                                                                                             at least a year (but excludes prior year sales of 
                                                                                             stores closed during the year) at constant foreign 
                                                                                             exchange rates. It is a widely used indicator of a 
                                                                                             retailer's current trading performance and is 
                                                                                             important when comparing growth between retailers 
                                                                                             that have different profiles of expansion, disposals 
                                                                                             and closures. 
 
 
APM               Closest     Adjustments to reconcile                       Note reference  Definition and purpose 
                  equivalent   to IFRS measure                               for 
                  IFRS                                                       reconciliation 
                  measure 
Profit measures 
Operating profit  Operating                                                  Note 2 
before            profit(*)      *    Exceptional items                                        *    Operating profit before exceptional items is the 
exceptional                                                                                         headline measure of the Group's performance. It is 
items                                                                                               based on operating profit before the impact of 
                                                                                                    certain costs or incomes that derive from events or 
                                                                                                    transactions that fall within the normal activities 
                                                                                                    of the Group, but which are excluded by virtue of 
                                                                                                    their size and nature in order to reflect 
                                                                                                    management's view of the performance of the Group. 
                                                                                                    This is a key management incentive metric. 
Operating margin  No direct                                                  Not applicable 
                  equivalent     *    Consistent with accounting policy                        *    Operating margin is calculated as operating profit 
                                                                                                    before exceptional items divided by revenue. 
                                                                                                    Progression in operating margin is an important 
                                                                                                    indicator of the Group's operating efficiency. 
Profit before     Profit                                                     Note 9 
tax before        before tax     *    Exceptional items                                       *    This measure excludes exceptional items and the net 
exceptional                                                                                        finance costs of the defined benefit pension deficit 
items and net                                                                                      as the costs are impacted by corporate bond yields, 
pension                          *    Net pension finance costs                                    which can fluctuate significantly and are reset each 
finance costs                                                                                      year based on often volatile external market factors. 
Profits/(losses)  No direct                                                  Not applicable 
arising on        equivalent     *    Consistent with accounting policy                       *    Profits/(losses) arising on property-related items 
property-related                                                                                   relates to the Group's property activities including; 
items                                                                                              gains and losses on disposal of property assets, 
                                                                                                   development property built for resale and property 
                                                                                                   joint ventures; costs resulting from changes in the 
                                                                                                   Group's store portfolio and distribution network, 
                                                                                                   including pre-opening and post-closure costs; and 
                                                                                                   income/(charges) associated with impairment of 
                                                                                                   non-trading property and related onerous contracts. 
 
 
                                                                                              *    These items are disclosed separately to clearly 
                                                                                                   identify the impact of these items versus the other 
                                                                                                   operating expenses related to the core retail and 
                                                                                                   financial services operations of the business. They 
                                                                                                   are often one-time in nature and can have a 
                                                                                                   disproportionate impact on profit between reporting 
                                                                                                   periods. 
Total finance     Finance                                                    Note 5 
costs before      costs          *    Exceptional items                                        *    Total finance costs before exceptional items and net 
exceptional                                                                                         pension finance costs is the net finance costs 
items and                                                                                           adjusted for non-recurring one off items, and net 
net pension                      *    Net pension finance costs                                     pension finance costs, as the costs are impacted by 
finance costs                                                                                       bond yields, which can fluctuate significantly and 
                                                                                                    are reset each year. 
Diluted earnings  Diluted                                                    Note 9 
per share         earnings       *    Exceptional items                                       *    This relates to profit after tax before exceptional 
from continuing   per share                                                                        items from continuing operations, attributable to 
operations                                                                                         owners of the parent divided by the weighted average 
before                           *    Discontinued operations                                      number of ordinary shares in issue during the 
exceptional                                                                                        financial period adjusted for the effects of 
items                                                                                              potentially dilutive options. 
 
 
                                                                                              *    It excludes the impact of certain costs or income 
                                                                                                   that derive from events or transactions that fall 
                                                                                                   within the normal activities of the Group, but which 
                                                                                                   are excluded by virtue of their size and nature in 
                                                                                                   order to reflect management's view of the performance 
                                                                                                   of the Group. 
Diluted earnings  Diluted                                                    Note 9 
per share from    earnings       *    Exceptional items                                        *    This relates to profit after tax before exceptional 
continuing        per share                                                                         items from continuing operations, and net pension 
operations                                                                                          finance costs attributable to owners of the parent 
before                           *    Net pension finance costs                                     divided by the weighted average number of ordinary 
exceptional                                                                                         shares in issue during the financial period adjusted 
items and net                                                                                       for the effects of potentially dilutive options. 
pension finance                  *    Discontinued operations 
costs 
                                                                                               *    It excludes the impact of certain costs or income 
                                                                                                    that fall within the normal activities of the Group, 
                                                                                                    but which are excluded by virtue of their size and 
                                                                                                    nature in order to reflect management's view of the 
                                                                                                    performance of the Group. It also excludes 
                                                                                                    potentially volatile net pension finance costs. 
Tax measures 
Effective tax     Effective                                                  Note 6 
rate before       tax rate      *    Exceptional items and their tax impact                   *    Effective tax rate before exceptional items is 
exceptional                                                                                        calculated as total income tax credit/(charge) 
items                                                                                              excluding the tax impact of exceptional items divided 
                                                                                                   by profit before tax before exceptional items. This 
                                                                                                   provides an indication of the ongoing tax rate across 
                                                                                                   the Group. 
 
 
APM           Closest     Adjustments to reconcile                                     Note reference  Definition and purpose 
              equivalent   to IFRS measure                                             for 
              IFRS                                                                     reconciliation 
              measure 
Effective     Effective                                                                Note 6 
tax           tax rate       *    Exceptional items and their tax impact                                 *    Effective tax rate before exceptional items and net 
rate before                                                                                                   pension finance costs is calculated as total income 
exceptional                                                                                                   tax credit/(charge) excluding the tax impact of 
items and                    *    Net pension finance costs and their tax impact                              exceptional items and net pension finance costs 
net pension                                                                                                   divided by the profit before tax before exceptional 
finance                                                                                                       items and net pension finance costs. 
costs 
Balance 
sheet 
measures 
Net debt      Borrowings                                                               Note 18 
              less cash      *    Net debt from Tesco Bank                                              *    Net debt excludes the net debt of Tesco Bank but 
              and                                                                                            includes that of the discontinued operations to 
              related                                                                                        reflect the net debt obligations of the Retail 
              hedges                                                                                         business. Net debt comprises bank and other 
                                                                                                             borrowings, finance lease payables, net derivative 
                                                                                                             financial instruments, joint venture loans and other 
                                                                                                             receivables and net interest receivables/ payables, 
                                                                                                             offset by cash and cash equivalents and short-term 
                                                                                                             investments. It is a useful measure of the progress 
                                                                                                             in generating cash and strengthening of our balance 
                                                                                                             sheet position and is a measure widely used by credit 
                                                                                                             rating agencies. 
Total         Borrowings                                                               Page 8 of the 
indebtedness  less cash     *    Net debt from Tesco Bank                              Preliminary       *    Total indebtedness is the net debt plus the IAS19 
              and                                                                      Results                deficit in the pension schemes (net of associated 
              related                                                                  2016/17                deferred tax) plus the present value of future 
              hedges        *    Present value of future minimum lease payments under                         minimum lease payments under non-cancellable 
                                 non-cancellable operating leases.                                            operating leases to provide an overall view of the 
                                                                                                              Group's obligations. It is an important measure of 
                                                                                                              the long term obligations of the Group and is a 
                            *    IAS19 deficit in the pension schemes                                         measure widely used by credit rating agencies. 
Cash flow 
measures 
Retail        Cash                                                                     Note 2 
operating     generated      *    Tesco Bank operating cash flow                                        *    Retail operating cash flow is the cash generated from 
cash flow     from                                                                                           operations of continuing operations, excluding the 
              operating                                                                                      effects of Tesco Bank cash flows. It is a measure of 
              activities     *    Discontinued operations                                                    the cash generation and working capital efficiency by 
                                                                                                             the retail business, recognising that Tesco Bank is 
                                                                                                             run and regulated independently from the retail 
                                                                                                             operations, and a key measure to demonstrate the 
                                                                                                             recovery of the retail operations. This is a key 
                                                                                                             management incentive metric. 
Free cash     Cash                                                                     Note 2 
flow          generated     *    Purchase of property, plant and equipment, investmen                    *    Free cash flow is net cash generated from/(used in) 
              from         t                                                                                  operating activities less capital expenditure on 
              operating          property and non-current assets classified as held                           property, plant and equipment, investment property 
              activities         for sale                                                                     and intangible assets. It is a measure of cash 
                                                                                                              generation, working capital efficiency and capital 
                                                                                                              discipline of the business. 
                            *    Purchase of intangible assets 
 

(*) Operating profit is not defined per IFRS, however is a generally accepted profit measure.

Glossary - Other

Capital expenditure (Capex)

The additions to property, plant and equipment, investment property and intangible assets (excluding assets acquired under business combinations).

Capital employed

Net assets plus net debt plus dividend creditor less net assets of the disposal groups and non-current assets classified as held for sale.

Enterprise Value

This is calculated as market capitalisation plus net debt.

FTE

FTE refers to full-time equivalents.

LPI

LPI refers to Limited Price Inflation.

Market capitalisation

The total value of all Tesco shares calculated as total number of shares multiplied by closing share price at year-end.

MTN

MTN refers to Medium Term Note.

Net Promoter Score (NPS)

This is a loyalty measure based on a single question requiring a score between 0-10. The NPS is calculated by subtracting the percentage of detractors (scoring 0-6) from the percentage of promoters (scoring 9-10). This generates a figure between -100 and 100 which is the NPS.

Return on capital employed (ROCE)

Return divided by the average of opening and closing capital employed.

Return

Profit before exceptional items and interest, after tax (applied at effective rate of tax).

RPI

RPI refers to Retail Price Index.

Total shareholder return

The notional annualised return from a share, measured as the percentage change in the share price, plus the dividends paid with the gross dividends reinvested in Tesco shares. This is measured over both a one and five year period.

Independent auditor's report to the members of Tesco PLC on the Preliminary Announcement of Tesco PLC

We confirm that we have issued an unqualified opinion on the full financial statements of Tesco PLC.

Our audit report on the Group Financial Statements sets out the following risks of material misstatement which had the greatest effect on our audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team, together with how our audit responded to those risks:

 
 
Risk description 
 The Group held GBP18,108m (2015/16: GBP17,900m) of property, plant and equipment at 25 February 
 2017. 
 Under IFRS, the Group is required to complete an impairment review of its store portfolio 
 where there are indicators of impairment or impairment reversal. 
 There continues to be judgement required in identifying indicators of impairment and determining 
 the fair value of the Group's store portfolio. Additionally, there is judgement is relation 
 to triggering the reversals of impairments recognised in previous periods. 
 In light of the continued competitive environment in which the Group operates and changes 
 in the macro environment, there is a risk that the carrying value of stores and related fixed 
 assets may be higher than the recoverable amount. Where a review for impairment, or reversal 
 of impairment, is conducted, the recoverable amount is determined based on the higher of 'value 
 in use' and 'fair value less costs of disposal': 
 
  *    value in use is calculated from cash flow projections 
       and relies upon the Directors' assumptions and 
       estimates of future trading performance, longer-term 
       growth rates and discount rates utilised; and 
 
 
  *    fair value less costs of disposal is determined by 
       reference to a sample of valuations completed by 
       independent valuation specialists where applicable. 
 
 
 As a result of the Group's impairment review completed during the year, an impairment release 
 of GBP6m (2015/16: charge of GBP18m) was recognised. 
 How the scope of our audit responded to the risk 
 Our audit procedures included assessing the design and implementation of key controls around 
 the impairment review processes, assessing the appropriateness of the methodology applied 
 by the Directors in calculating the impairment charges and reversals, and the judgements applied 
 in determining the cash generating units ("CGUs") of the business, which the Group has determined 
 as being individual stores and, in the UK, the general merchandising online business. As part 
 of our procedures we have used data analytics to assist us in determining the completeness 
 of the impairment indicator assessment. 
 In relation to the completeness of the Group's impairment review process, we have assessed 
 the completeness of the Group's impairment charges and impairment reversals with reference 
 to CGU performance. 
 In relation to the Group's 'value in use' valuations, we have assessed the review completed 
 by the Group by: 
 
  *    assessing the methodology applied in determining the 
       value in use compared with the requirements of IAS 36 
       Impairment of Assets and checking the integrity of 
       the impairment model utilised by the Group; 
 
 
  *    challenging the key assumptions utilised in the cash 
       flow forecasts with reference to historical trading 
       performance, market expectations and our 
       understanding of the Group's strategic initiatives; 
 
 
  *    assessing the long-term growth rates and discount 
       rates applied to the impairment review for each 
       country, comparing the rates utilised to third party 
       evidence and in relation to the discount rate, our 
       independently estimated discount rates; and 
 
 
  *    completing sensitivity analysis in relation to key 
       assumptions to consider the extent of change in those 
       assumptions that either individually or collectively 
       would be required for the assets to be impaired, in 
       particular property fair values, long term growth 
       rates and discount rates applied. 
 
 
 In relation to the Group's 'fair value less costs of disposal', we have challenged the assumptions 
 used by the Group in determining the fair market value of the assets, including those completed 
 by external valuers, using internal property valuation specialists and assessing whether appropriate 
 valuation methodologies have been applied. 
 Additionally, we assess the adequacy of the store impairment related disclosures. 
 Key observations 
 Whilst we note actions are required by the Group to achieve these forecasts over the medium 
 term, we concluded that the assumptions in the impairment models were within an acceptable 
 range, and that the overall level of net reversal of impairment was reasonable. 
 We also agree that the disclosure of the net impairment as an exceptional item is in accordance 
 with the Group's policy on exceptional items. 
 
 
 
Risk description 
 The Group has agreements with suppliers whereby volume-related allowances, promotional and 
 marketing allowances and various other fees and discounts are received in connection with 
 the purchase of goods for resale from those suppliers. As such, the Group recognises a reduction 
 in cost of sales as a result of amounts receivable from suppliers. 
 In accordance with IFRS, commercial income should only be recognised as income within the 
 income statement when the performance conditions associated with it have been met, for example 
 where the marketing campaign has been held. 
 The variety and number of the buying arrangements with suppliers can make it complex to determine 
 the performance conditions associated with the income, giving rise to a requirement for management 
 judgement and scope for error in accounting for such income. As such we have identified this 
 as a key risk. 
 How the scope of our audit responded to the risk 
 We obtained a detailed understanding and evaluated the design and implementation of controls 
 that the Group has established in relation to commercial income. 
 In addition, our substantive audit procedures across the Group's retail operations included 
 a combination of the following: 
 
  *    we tested whether amounts recognised were accurate 
       and recorded in the correct period based on the 
       contractual performance obligations by agreeing a 
       sample of individual supplier agreements; 
 
 
  *    commercial income balances included within 
       inventories and trade and other receivables, or 
       netted against trade and other payables have been 
       tested via balance sheet reconciliation procedures; 
 
 
  *    we circularised a sample of suppliers to test whether 
       the arrangements recorded were complete and held 
       discussions with a sample of buyers to further 
       understand the buying processes where required. Where 
       responses from suppliers were not received, we 
       completed alternative procedures such as agreement to 
       underlying contractual arrangements; 
 
 
  *    we used data analytics to profile commercial income, 
       identifying deals which exhibited characteristics of 
       audit interest upon which we completed detailed 
       testing; 
 
 
  *    we reviewed the steps taken by the Group to address 
       the recommendations made by the Groceries Code 
       Adjudicator ("GCA") and reviewed the Group's ongoing 
       compliance with the Groceries Supplier Code of 
       Practice ("GSCOP"). Additionally, we reviewed the 
       reporting and correspondence to the supplier hotline 
       in order to help identify any areas where further 
       investigation was required; and 
 
 
  *    we also considered the adequacy of the commercial 
       income related disclosure within the Group's 
       financial statements. 
 
 
 Key observations 
 The results of our testing were satisfactory. We consider the disclosure given around supplier 
 rebates to provide an appropriate understanding of the types of rebate income received and 
 impact on the Group's balance sheet as at 25 February 2017. 
Pension obligation valuation 
Risk description 
 The Group has a defined benefit pension plan in the UK. At 25 February 2017, the Group recorded 
 a net retirement obligation before deferred tax of GBP6,621m (2015/16: GBP3,175m), comprising 
 scheme assets of GBP13,196m (2015/16: GBP10,302m) and scheme liabilities of GBP19,817m (2015/16: 
 GBP13,477m). 
 The pension valuation is dependent on market conditions and assumptions made. The risk specifically 
 relates to the following key assumptions: discount rate, inflation expectations and life expectancy 
 assumptions. The setting of these assumptions is complex and requires the exercise of significant 
 management judgement with the support of third party actuaries. 
 How the scope of our audit responded to the risk 
 We obtained a detailed understanding and evaluated the design and implementation of controls 
 that the Group has established in relation to the pension obligation valuation process. 
 In testing the pension valuation, we have utilised internal pension actuarial specialists 
 to review the key actuarial assumptions used, both financial and demographic, and considered 
 the methodology utilised to derive these assumptions. Furthermore, we have benchmarked and 
 performed a sensitivity analysis on the key assumptions determined by the Directors. 
 Key observations 
 We are satisfied that the methodology and assumptions applied in relation to determining the 
 pension valuation are within an acceptable range. 
 
 
 
Risk description 
 The Group has been under investigation by the Serious Fraud Office (SFO) in the UK following 
 the commercial income misstatements identified in 2014/15. On 10 April 2017, the Group announced 
 that its subsidiary, Tesco Stores Limited, had reached a Deferred Prosecution Agreement (DPA) 
 with the SFO. In addition, Tesco PLC and Tesco Stores Limited accepted a finding of market 
 abuse from the FCA, arising from the same circumstances and as a result will implement a compensation 
 scheme. This brings greater certainty to the Group's exposure and a GBP235m liability has 
 been recognised accordingly. Additionally, in 2016/17 UK shareholder actions were initiated 
 against the Group linked to the commercial income misstatements identified in 2014/15 which 
 may result in legal exposures. Separately, the Group has other ongoing legal matters relating 
 to previous corporate transactions which require management judgement to be applied in order 
 to determine the likely outcome. 
 As a result, judgement is required in assessing the nature of these exposures and their accounting 
 and disclosure requirements. 
 How the scope of our audit responded to the risk 
 In assessing the potential exposures to the Group, we have completed a range of procedures 
 including : 
 
  *    assessing the design and implementation of controls 
       in relation to the monitoring of known exposures; 
 
 
  *    reading Board and other meeting minutes to identify 
       areas subject to Group consideration; 
 
 
  *    meeting with the Group's internal legal advisors in 
       understanding ongoing and potential legal matters 
       impacting the Group; 
 
 
  *    reviewing third party correspondence and reports; and 
 
 
  *    reviewing the proposed accounting and disclosure of 
       actual and potential legal liabilities, drawing on 
       third party assessment of open matters. 
 
 
 Key observations 
 We concur that the liability recognised by management in respect of the DPA and the FCA compensation 
 scheme and the disclosures in relation to the ongoing UK shareholder actions are appropriate. 
 In relation to other ongoing legal matters in respect of previous corporate transactions, 
 we are satisfied no specific disclosure is required. 
 
 
 
Risk description 
 The Group carries inventory at the lower of cost and net realisable value. As at 25 February 
 2017, the Group held inventories of GBP2,301m (2015/16: GBP2,430m). The Group provides for 
 obsolescence based on forecast inventory usage. This methodology relies upon assumptions made 
 in determining appropriate provisioning percentages to estimates of future sales. 
 How the scope of our audit responded to the risk 
 We obtained a detailed understanding and evaluated the design and implementation of controls 
 that the Group has established in relation to inventory valuation. 
 We obtained assurance over the appropriateness of management's assumptions applied in calculating 
 the value of inventory provisions by: 
 
  *    critically assessing the Group's inventory 
       provisioning policy, with specific consideration 
       given to aged inventory (especially for non-food and 
       general merchandising products) as well as stock turn 
       calculations, including the impact of seasonality; 
 
 
  *    verifying the value of a sample of inventory to 
       confirm whether it is held at the lower of cost and 
       net realisable value, through comparison to vendor 
       invoices and sales prices; 
 
 
  *    within the UK business, using data analytics to 
       identify unusual inventory usage characteristics, 
       completing assumption tolerance testing and 
       recalculating the provision in totality based on the 
       Group's policy; and 
 
 
  *    reviewing historical accuracy of inventory 
       provisioning with reference to inventory write-offs 
       during the year in relation to stock loss or other 
       inventory adjustments. 
 
 
 Key observations 
 We concur that the total level of provision is within an acceptable range. 
 
 
 
Risk description 
 There are a number of areas within the Group financial statements which comprise accounting 
 estimates by management and accordingly there is a risk that the Group's results are influenced 
 through management bias in determining such estimates. Additionally, the Group's processes 
 continue to be complex and reliant on legacy IT systems which lead to an increased risk of 
 management override of controls. 
 Specifically this risk lies in those areas with high levels of judgement such as commercial 
 income, value-in-use calculations within the impairment reviews, inventory accounting and 
 provisioning. 
 Management also exercises judgement in the presentation of the Group's income statement and 
 the quality of the Group's earnings. 
 A risk exists that invalid journal entries are recorded to influence the results and/or the 
 financial position as desired through the override of controls implemented to prevent the 
 recording of inappropriate journals. 
 
 How the scope of our audit responded to the risk 
 In order to address this risk, in addition to the procedures set out in the commercial income, 
 impairment and inventory risks 
 above, we have completed audit procedures including: 
 
  *    assessing the design and implementation of controls 
       which address the risk of management override, such 
       as the 'entity level' controls which underpin the 
       overall control environment for the Group; 
 
 
  *    auditing key areas of management estimate and 
       judgement, including consideration of exceptional 
       items disclosed by the Group and the existence of any 
       further potential exceptional items included within 
       the Group's underlying profit measures; 
 
 
  *    using data analytics, testing journal entries for 
       fraud characteristics by testing the completeness of 
       the journal population reviewed and risk profiling 
       the population to focus our work on journals of 
       interest; 
 
 
  *    assessing transactions completed outside of the 
       normal course of business; and 
 
 
  *    obtaining an understanding of the work of internal 
       audit so as to assist us in directing our audit 
       effort and obtaining greater understanding of the 
       controls in place across the Group. 
 
 
 Key observations 
 We have no matters to highlight in these areas. 
 However, we note that consistent with other businesses of a similar scale to the Group, there 
 are non-recurring income and expense items included within profit before exceptional items 
 which do not meet the Group's definition of exceptional items and which largely offset. We 
 concur that these have been appropriately included within profit before exceptional items. 
 
 
 
Risk description 
 In November 2016, Tesco Bank's debit cards were the subject of an online fraudulent attack. 
 The Group continues to work closely with the authorities and regulators on this incident. 
 There is a risk that the Group has not identified and accounted for any liabilities which 
 may arise from the incident. 
 How the scope of our audit responded to the risk 
 In assessing the potential exposures to the Bank, we have completed a range of procedures 
 including: 
 
  *    understanding the cause of the issue, reviewing the 
       incident reports prepared by external consultants and 
       understanding management's response to findings; 
 
 
  *    understanding the status of discussions with 
       authorities and regulators; 
 
 
  *    assessing the fraud losses and the treatment of 
       associated recoveries from merchants; and 
 
 
  *    assessing whether the Group has appropriately 
       identified and accounted for any other liabilities 
       related to the payment fraud. 
 
 
 Key observations 
 We are satisfied that the Group has appropriately accounted for liabilities associated with 
 the incident. 
 
 
 
 
Risk description 
 The Group's retail operations utilise a range of information systems where in 2015/16 we identified 
 deficiencies in certain IT controls. These deficiencies could have an adverse impact on the 
 Group's controls and financial reporting systems. 
 The Group is undergoing the replacement of a number of the Group's key systems and changes 
 to key elements of the Group's IT infrastructure. 
 How the scope of our audit responded to the risk 
 We have understood the Group's replacement programme and the planned enhancements to the retail 
 technology environment, including IT security. 
 During the year we have assessed the design and implementation of the Group's controls over 
 the information systems that are important to financial reporting, including the changes made 
 as part of the Group's replacement programme. 
 Where we noted deficiencies which affected applications and databases within the scope of 
 our audit, we extended the scope of our substantive audit procedures. 
 Key observations 
 Although we note progress has been made during the year in enhancing the Group's controls 
 over the information systems described above, given the complexity of the underlying systems 
 the remediation process is not yet complete and therefore weaknesses remain in the control 
 environment. The historical weaknesses we noted last year in relation to user access and change 
 management controls linked to the Group's financial reporting systems are in the process of 
 being remediated. 
 

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we did not provide a separate opinion on these matters.

Our liability for this report, and for our full audit report on the financial statements is to the Company's members as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for our audit report or this report, or for the opinions we have formed.

Deloitte LLP

Chartered Accountants and Statutory Auditor

Appendix 1

Total sales performance at actual rates (exc. VAT, exc. fuel)

 
                    1Q        2Q        3Q        4Q        1H        2H        FY 
                  2016/17   2016/17   2016/17   2016/17   2016/17   2016/17   2016/17 
UK & ROI           0.7%      1.7%      2.3%      0.7%      1.2%      1.5%      1.4% 
  UK               0.3%      1.0%      1.4%      0.2%      0.7%      0.8%      0.7% 
  ROI              8.7%     15.3%     19.7%     11.9%     11.9%     15.6%     13.8% 
International      5.6%     16.5%     23.2%     16.1%     10.9%     19.5%     15.2% 
  Europe           8.2%     15.1%     19.6%     12.3%     11.6%     15.7%     13.7% 
  Asia             2.8%     18.2%     27.7%     20.9%     10.1%     24.1%     17.1% 
Tesco Bank         3.5%      7.2%      6.3%      6.9%      5.3%      6.6%      6.0% 
Group              1.8%      4.7%      6.5%      4.1%      3.3%      5.2%      4.3% 
 

Appendix 2

Total sales performance at constant rates (exc. VAT, exc. fuel)(*)

 
                    1Q        2Q        3Q        4Q        1H        2H        FY 
                  2016/17   2016/17   2016/17   2016/17   2016/17   2016/17   2016/17 
UK & ROI           0.3%      1.0%      1.4%      0.1%      0.6%      0.6%      0.6% 
  UK               0.3%      1.0%      1.4%      0.2%      0.7%      0.7%      0.7% 
  ROI              0.2%     (0.3)%     0.0%     (1.7)%    (0.1)%    (0.9)%    (0.5)% 
International      3.6%      2.8%      1.5%      0.6%      3.2%      1.0%      2.1% 
  Europe           2.4%      1.2%      0.1%     (1.5)%     1.8%     (0.7)%     0.5% 
  Asia             5.0%      4.8%      3.2%      3.2%      4.9%      3.2%      4.0% 
Tesco Bank         3.5%      7.2%      6.3%      6.9%      5.3%      6.6%      6.0% 
Group              1.1%      1.5%      1.5%      0.3%      1.3%      0.9%      1.1% 
 

(*) These results have been reported on a continuing operations basis and exclude the results from our operations in Turkey.

Growth rates are all based on comparable days.

Appendix 3

Country detail

 
                          Revenue 
                    (exc. VAT, inc. fuel) 
                           Local            GBPm   Average exchange rate  Closing exchange rate 
                          currency 
                             (m) 
UK                         41,458          41,458          1.000                  1.000 
ROI                        2,483           2,066           1.202                  1.184 
Czech Republic             43,017          1,324           32.49                  31.98 
Hungary                   595,463          1,593           373.8                  365.0 
Poland                     10,832          2,070           5.233                  5.096 
Slovakia                   1,405           1,169           1.202                  1.184 
Malaysia                   4,458            808            5.517                  5.557 
Thailand                  204,059          4,378           46.61                  43.66 
 
 

Appendix 4

UK sales area by size of store

 
Store size (sq ft)               February 2017                             February 2016 
                    No. of stores  Million  % of total sq ft  No. of stores  Million  % of total sq ft 
                                    sq ft                                     sq ft 
0 - 3,000               2,507        5.2         13.1%            2,498        5.2         12.5% 
3,001 - 20,000           288         3.4          8.6%             289         3.5          8.4% 
20,001 - 40,000          283         8.2         20.5%             283         8.3         20.0% 
40,001 - 60,000          182         9.4         23.5%             204        10.4         25.0% 
60,001 - 80,000          120         8.6         21.5%             132         8.9         21.5% 
80,001 - 100,000         45          4.2         10.6%             45          4.2         10.2% 
Over 100,000              8          0.9          2.2%              9          1.0          2.4% 
Total(*)                3,433       39.9         100.0%           3,460       41.5         100.0% 
 

(*) Excludes franchise stores.

Appendix 5

Actual Group space - store numbers(a)

 
                         2015/16 year end   2016/17     Net gain/    Openings  Closures/   Repurposing/ 
                                            year end   Reduction(b)             disposals   extensions 
     Extra                     252            252           -           -          -            14 
     Superstore                478            479           1           2         (1)           - 
     Metro                     177            176          (1)          -         (1)           - 
     Express                  1,732          1,740          8           17        (9)           - 
     Dotcom only                6              6            -           -          -            - 
     Total Tesco              2,645          2,653          8           19        (11)          14 
     One Stop(c)               779            780           1           23        (22)          - 
     Dobbies                    36             -          (36)          -         (36)          - 
  UK(c)                       3,460          3,433        (27)          42        (69)          14 
  ROI                          149            148          (1)          -         (1)           - 
UK & ROI(c)                   3,609          3,581        (28)          42        (70)          14 
     Czech Republic(c)         201            198          (3)          -         (3)           1 
     Hungary                   208            206          (2)          -         (2)           2 
     Poland                    440            429         (11)          -         (11)          1 
     Slovakia                  161            154          (7)                    (7)           2 
  Europe(c)                   1,010           987         (23)          -         (23)          6 
     Malaysia                   62            71            9           9          -            6 
     Thailand                 1,815          1,914         99          105        (6)           44 
  Asia                        1,877          1,985         108         114        (6)           50 
International(c)              2,887          2,972         85          114        (29)          56 
Group(c)                      6,496          6,553         57          156        (99)          70 
  UK (One Stop)                134            158          24           32        (8)           - 
  Czech Republic               103            98           (5)          -         (5)           - 
Franchise stores               237            256          19           32        (13)          - 
 

(a) Continuing operations.

(b) The net gain/reduction reflects the number of store openings less the number of store closures/disposals.

(c) Excludes franchise stores.

Actual Group space - '000 sq ft(a)

 
                         2015/16 year end  2016/17 year end  Net gain/   Openings  Closures/    Repurposing/ 
                                                              reduction             disposals   Extensions(c) 
     Extra                    17,846            17,748          (98)        -          -            (98) 
     Superstore               14,002            14,075           73         96        (23)           - 
     Metro                    2,005             1,993           (12)        -         (12)           - 
     Express                  4,031             4,054            23         40        (17)           - 
     Dotcom only               716               716             -          -          -             - 
     Total Tesco              38,600            38,586          (14)       136        (52)          (98) 
     One Stop(b)              1,256             1,269            13         44        (31)           - 
     Dobbies                  1,652               -           (1,652)       -       (1,652)          - 
  UK(b)                       41,508            39,855        (1,653)      180      (1,735)         (98) 
  ROI                         3,560             3,543           (17)        -         (17)           - 
UK & ROI(b)                   45,068            43,398        (1,670)      180      (1,752)         (98) 
     Czech Republic(b)        5,558             5,479           (79)        -         (28)          (51) 
     Hungary                  6,931             6,896           (35)        -         (5)           (30) 
     Poland                   9,688             9,578          (110)        -         (85)          (25) 
     Slovakia                 3,969             3,859          (110)        -         (83)          (27) 
  Europe(b)                   26,146            25,812         (334)        -        (201)         (133) 
     Malaysia                 4,164             4,005          (159)        35         -           (194) 
     Thailand                 15,536            15,522          (14)       514        (26)         (502) 
  Asia                        19,700            19,527         (173)       549        (26)         (696) 
International(b)              45,846            45,339         (507)       549       (227)         (829) 
Group(b)                      90,914            88,737        (2,177)      729      (1,979)        (927) 
  UK (One Stop)                185               212             27         39        (12)           - 
  Czech Republic                96                92            (4)         -         (4)            - 
Franchise stores               281               304             23         39        (16)           - 
 

(a) Continuing operations.

(b) Excludes franchise stores.

(c) Repurposing of gross selling space is not included in the above net selling space measure.

Group space forecast to 24 February 2018 - '000 sq ft(a)

 
                         2016/17 year end  2017/18 year end  Net gain/   Openings  Closures/   Repurposing/ 
                                                              reduction             disposals   extensions 
     Extra                    17,748            17,748           -          -          -            - 
     Superstore               14,075            14,149           74         74         -            - 
     Metro                    1,993             1,993            -          -          -            - 
     Express                  4,054             4,112            58         60        (2)           - 
     Dotcom only               716               716             -          -          -            - 
     Total Tesco              38,586            38,718          132        134        (2)           - 
     One Stop(b)              1,269             1,297            28         49        (21)          - 
  UK(b)                       39,855            40,015          160        183        (23)          - 
  ROI                         3,543             3,584            41         40         -            1 
UK & ROI(b)                   43,398            43,599          201        223        (23)          1 
     Czech Republic(b)        5,479             5,049          (430)        -        (291)        (139) 
     Hungary                  6,896             6,800           (96)        -          -           (96) 
     Poland                   9,578             9,221          (357)        -        (167)        (190) 
     Slovakia                 3,859             3,630          (229)        -        (208)         (21) 
  Europe(b)                   25,812            24,700        (1,112)       -        (666)        (446) 
     Malaysia                 4,005             3,891          (114)        65        (60)        (119) 
     Thailand                 15,522            15,622          100        436        (16)        (320) 
  Asia                        19,527            19,513          (14)       501        (76)        (439) 
International(b)              45,339            44,213        (1,126)      501       (742)        (885) 
Group(b)                      88,737            87,812         (925)       724       (765)        (884) 
  UK (One Stop)                212               277             65         65         -            - 
  Czech Republic                92                92             -          -          -            - 
Franchise stores               304               369             65         65         -            - 
 

(a) Continuing operations.

(b) Excludes franchise stores.

Appendix 6

Tesco Bank income statement

 
                                                                   2016/17(a)  2015/16(a) 
                                                                      GBPm        GBPm 
Revenue 
Interest receivable and similar income                                622         576 
Fees and commissions receivable                                       390         379 
                                                                     1,012        955 
 
Direct costs 
Interest payable                                                     (175)       (166) 
Fees and commissions payable                                          (23)        (3) 
                                                                     (198)       (169) 
 
Gross profit                                                          814         786 
 
Other expenses: 
Staff costs                                                          (165)       (172) 
Premises and equipment                                                (76)        (81) 
Other administrative expenses                                        (215)       (212) 
Depreciation and amortisation                                         (96)        (91) 
Provisions for bad and doubtful debts                                (105)        (68) 
 
Operating profit before exceptional items                             157         162 
 
Restructuring and other exceptional items(b)                          (80)        (1) 
 
Operating profit                                                       77         161 
 
Net finance costs: movements on derivatives and hedge accounting       6          (8) 
Net finance costs: interest                                           (4)         (4) 
Share of profit/(loss) of joint venture(c)                            (16)        (3) 
Deduct: management charges                                             -          (1) 
 
Profit before tax                                                      63         145 
 

(a) These results are for the 12 months ended 28 February 2017 and the previous period comparison is made with the 12 months ended 29 February 2016.

(b) Restructuring and other exceptional items in 2016/17 consists of an increase in the provision for customer redress of GBP45m and business simplification and head office relocation costs of GBP35m.

(c) Share of profit/(loss) of joint venture includes a charge of GBP23m, representing the Group's share of losses incurred by Tesco Underwriting Limited (TU) relating to the impact on TU's insurance reserves of a change in the Ogden tables, which are used to calculate future losses in personal injury and fatal accident cases. The GBP23m charge has been reported as an exceptional item in the Group income statement.

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR BCGDSUGBBGRB

(END) Dow Jones Newswires

April 12, 2017 02:00 ET (06:00 GMT)

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