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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
---|---|---|---|---|---|
Tesco Plc | LSE:TSCO | London | Ordinary Share | GB00BLGZ9862 | ORD 6 1/3P |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
1.50 | 0.48% | 311.70 | 311.40 | 311.60 | 313.10 | 309.40 | 309.80 | 10,789,294 | 16:35:21 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
Grocery Stores | 68.9B | 1.19B | 0.1670 | 18.65 | 22.15B |
TIDMTSCO
RNS Number : 3720V
Tesco PLC
14 April 2021
Notes to the Group financial statements
Note 10 Goodwill and other intangible assets continued
Customer Intangible Goodwill Software(a) relationships(c) assets Total GBPm GBPm GBPm GBPm GBPm Cost At 23 February 2019 (restated(b) ) 5,509 1,840 715 447 8,511 Foreign currency translation (5) (2) - (1) (8) Additions - 188 - 19 207 Reclassification - 40 - (5) 35 Disposals (27) (198) - (2) (227) At 29 February 2020 (restated(b) ) 5,477 1,868 715 458 8,518 Accumulated amortisation and impairment losses At 23 February 2019 641 1,254 72 321 2,288 Foreign currency translation (4) (1) - - (5) Charge for the year(e) - 281 76 10 367 Impairment losses(f) - 15 - 12 27 Reversal of impairment losses(f) - (31) - (7) (38) Reclassification - 2 - (3) (1) Disposals - (196) - (2) (198) At 29 February 2020 637 1,324 148 331 2,440 (a)-(e) Refer to previous table for footnotes. Customer Intangible Goodwill Software relationships assets Total GBPm GBPm GBPm GBPm GBPm Cost At 24 February 2018 (restated(b) ) 2,417 3,166 - 392 5,975 Foreign currency translation (6) 1 - (1) (6) Additions - 167 - 24 191 Acquired through business combinations 3,098 - 715 48 3,861 Reclassification - (140) - 2 (138) Disposals - (308) - (15) (323) Fully-amortised assets - (1,046) - (3) (1,049) At 23 February 2019 (restated(b) ) 5,509 1,840 715 447 8,511 Accumulated amortisation and impairment losses At 24 February 2018 662 2,378 - 315 3,355 Foreign currency translation (21) - - (2) (23) Charge for the year - 210 72 13 295 Impairment losses - 15 - 27 42 Reversal of impairment losses - (2) - (24) (26) Disposals - (301) - (5) (306) Fully-amortised assets - (1,046) - (3) (1,049) 23 February 2019 641 1,254 72 321 2,288
(b) Refer to Note 1 for further details regarding prior year restatement.
Notes to the Group financial statements
Note 11 Property, plant and equipment
Land and buildings Other(a) Total GBPm GBPm GBPm Cost At 29 February 2020 24,868 6,925 31,793 Foreign currency translation (38) (15) (53) Additions (b) 927 623 1,550 Acquired through business combinations 8 4 12 Transfers (to)/from assets classified as held for sale 29 - 29 Transfer to disposal group classified as held for sale (3,642) (1,415) (5,057) Disposals (128) (379) (507) At 27 February 2021 22,024 5,743 27,767 Accumulated depreciation and impairment losses At 29 February 2020 7,841 4,718 12,559 Foreign currency translation (15) (10) (25) Charge for the year 432 489 921 Impairment losses (c) 353 107 460 Reversal of impairment losses (c) (515) (43) (558) Transfers (to)/from assets classified as held for sale 15 - 15 Transfer to disposal group classified as held for sale (1,386) (987) (2,373) Disposals (72) (371) (443) At 27 February 2021 6,653 3,903 10,556 Net carrying value At 27 February 2021 (d) 15,371 1,840 17,211 At 29 February 2020 17,027 2,207 19,234 Construction in progress included above (e) At 27 February 2021 77 210 287 At 29 February 2020 88 114 202
(a) Other assets consist of fixtures and fittings with a net carrying value of GBP1,345m (2020: GBP1,712m), office equipment with a net carrying value of GBP213m (2020: GBP245m) and motor vehicles
with a net carrying value of GBP282m (2020: GBP250m)
(b) Includes GBP476m of land and buildings related to obtaining control of The Tesco Property (No. 2) Limited Partnership, which was impaired by GBP(32)m on acquisition (2020: GBP914m of land and buildings related to obtaining control of The Tesco Atrato Limited Partnership, which was impaired by GBP(287)m on acquisition). The GBP476m additions comprised GBP492m cost of acquisition offset by GBP16m of historical deferred profit. Refer to the breakdown of assets and liabilities acquired within Note 33.
(c) Refer to Note 15.
(d) Includes GBP2,099m (2020: GBP1,406m) of assets pledged as security for secured bonds (refer to Note 23 and GBP826m (2020: GBP478m) of property held as security in favour of the Tesco PLC Pension Scheme (refer to Note 29.
(e) Construction in progress does not include land. Land and buildings Other(a) Total GBPm GBPm GBPm Cost At 23 February 2019 24,484 6,993 31,477 Foreign currency translation (69) (15) (84) Additions(b) 1,285 621 1,906 Reclassification (24) (28) (52) Classified as held for sale (589) (36) (625) Disposals (219) (610) (829) At 29 February 2020 24,868 6,925 31,793 Accumulated depreciation and impairment losses (restated) At 23 February 2019 7,523 4,768 12,291 Foreign currency translation (23) (11) (34) Charge for the year 525 613 1,138 Impairment losses(c) 611 111 722 Reversal of impairment losses(c) (391) (104) (495) Reclassification 41 (23) 18 Classified as held for sale (298) (34) (332) Disposals (147) (602) (749) At 29 February 2020 7,841 4,718 12,559 Net carrying value (d) 17,027 2,207 19,234
(a)-(d) Refer to previous table for footnotes
Notes to the Group financial statements
Note 12 Leases
Group as lessee
Lease liabilities represent rentals payable by the Group for certain retail, distribution and office properties and other assets such as motor vehicles. The leases have varying terms, purchase options, escalation clauses and renewal rights. Purchase options and renewal rights, where they occur, are at market value. Escalation clauses are in line with market practices and include inflation-linked, fixed rates, resets to market rents and hybrids of these.
In prior years, the Group entered into several joint ventures, and sold and leased back properties to and from these joint ventures over 20 to 30-year terms. On certain transactions, the Group has an option to buy back either the leased asset or the equity of the other party, at market value and at a specified date, typically at year 10. On some of these transactions the Group also has a lease-break option, which is exercisable if the buyback option is exercised and the associated debt in the joint venture is repaid. The lease liability in respect of these leases assumes that the lease-break option is not exercised.
On 18 September 2020, the Group obtained control of The Tesco Property (No. 2) Limited Partnership, previously accounted for as a joint venture, through the acquisition of the other partner's 50% interest, at which point the associated property leases from the joint venture became intercompany leases and are eliminated on consolidation. Refer to Note 33 for further details.
Right of use assets
Land and buildings Other Total GBPm GBPm GBPm Net carrying value at 29 February 2020 6,734 140 6,874 Additions (including through business combinations) 308 42 350 Depreciation charge for the year (517) (49) (566) Impairment losses (a) (225) - (225) Reversal of impairment losses (a) 230 - 230 Derecognition on acquisition of property joint venture (Note 33) (130) - (130) Transfer to disposal group classified as held for sale (724) (20) (744) Other movements (b) 190 (28) 162 Net carrying value at 27 February 2021 5,866 85 5,951 (a) Refer to Note 15.
(b) Other movements include lease terminations, modifications and reassessments, foreign exchange, reclassifications between asset classes and entering into finance subleases.
Land and buildings Other Total GBPm GBPm GBPm Net carrying value at 23 February 2019 7,561 152 7,713 Additions (including through business combinations) 146 58 204 Depreciation charge for the year (584) (67) (651) Impairment losses (a) (267) - (267) Reversal of impairment losses (a) 182 - 182 Derecognition on acquisition of property joint venture (335) - (335) Other movements (b) 31 (3) 28 Net carrying value at 29 February 2020 6,734 140 6,874
(a)-(b) Refer to footnotes in table above.
Lease liabilities
The following tables show the discounted lease liabilities included in the Group balance sheet and a maturity analysis of the contractual undiscounted lease payments:
2021 2020 GBPm GBPm Current 575 598 Non-current 7,827 8,968 Total lease liabilities 8,402 9,566 Maturity analysis - contractual undiscounted lease 2021 2020 payments GBPm GBPm Within one year 969 1,081 Greater than one year but less than two years 939 1,018 Greater than two years but less than three years 912 996 Greater than three years but less than four years 867 993 Greater than four years but less than five years 841 951 Greater than five years but less than ten years 3,597 4,178 Greater than ten years but less than fifteen years 2,443 2,810 After fifteen years 1,959 2,596 Total undiscounted lease payments 12,527 14,623
A reconciliation of the Group's opening to closing lease liabilities balance is presented in Note 32.
Notes to the Group financial statements
Note 12 Leases continued
Amounts recognised in the Group income statement
52 weeks 53 weeks 2021 2020* Continuing operations GBPm GBPm Interest on lease liabilities 446 486 Variable payment expenses not included in lease liabilities 1 1 Expenses relating to short-term leases 17 14 Expenses relating to leases of low value assets (excluding amounts already included in short-term leases above) 1 -
* Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.
Amounts recognised in the Group cash flow statement
52 weeks 53 weeks 2021 2020 GBPm GBPm Total cash outflow for leases* 1,109 1,175
* Includes GBP5m (2020: GBP5m) related to Tesco Bank.
Future possible cash outflows not included in the lease liability
Some leases contain break clauses or extension options to provide operational flexibility. Potential future undiscounted lease payments not included in the reasonably certain lease term, and hence not included in lease liabilities, total GBP10.8bn (2020: GBP11.8bn).
Future increases or decreases in rentals linked to an index or rate are not included in the lease liability until the change in cash flows takes effect. Approximately 75% (2020: 72%) of the Group's lease liabilities are subject to inflation-linked rentals and a further 15% (2020: 12%) are subject to rent reviews. Rental changes linked to inflation or rent reviews typically occur on an annual or five-yearly basis.
The Group is committed to payments totalling GBP36m (2020: GBP93m) in relation to leases that have been signed but have not yet commenced.
Group as lessor
The Group leases out owned properties and sublets leased properties under operating and finance leases. Such properties include malls, mall units, stores, units within stores, distribution centres and residential properties.
Amounts recognised in the Group income statement
52 weeks 53 weeks 2021 2020 (a) Continuing operations GBPm GBPm Finance lease - interest income (b) 5 4 Operating lease - rental income (c) 85 98
(a) Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.
(b) Includes GBP5m (2020: GBP4m) of sublease interest income. (c) Includes GBP22m (2020: GBP26m) of sublease rental income.
Finance lease payments receivable
The finance lease receivable (net investment in the lease) included in the Group balance sheet is GBP86m (2020: GBP48m).
Operating lease payments receivable maturity analysis
2021 2020 GBPm GBPm Within one year 74 220 Greater than one year but less than two years 52 128 Greater than two years but less than three years 41 71 Greater than three years but less than four years 32 38 Greater than four years but less than five years 24 27 Greater than five years but less than ten years 70 83 Greater than ten years but less than fifteen years 38 44 After fifteen years 65 82 Total undiscounted operating lease payments receivable 396 693
Notes to the Group financial statements
Note 13 Investment property
2021 2020 GBPm GBPm Cost At the beginning of the year 100 118 Foreign currency translation 1 (1) Reclassification (4) (11) Classified as held for sale 1 - Disposals (5) (6) At the end of the year 93 100 Accumulated depreciation and impairment losses At the beginning of the year 74 82 Foreign currency translation 1 (1) Charge for the year 1 1 Impairment losses for the year* 2 5 Reversal of impairment losses for the year* (2) (4) Reclassification (2) (4) Classified as held for sale 1 - Disposals (1) (5) At the end of the year 74 74 Net carrying value at the end of the year 19 26 Rental income earned from investment properties under operating leases 7 11 Direct operating expenses incurred on rental-earning investment properties - (3)
* Refer to Note 15.
The estimated fair value of the Group's investment property is GBP0.1bn (2020: GBP0.2bn). This fair value has been determined by applying an appropriate rental yield to the rentals earned by the investment property. A valuation has not been performed by an independent valuer.
Note 14 Group entities
The Group consists of the ultimate Parent Company, Tesco PLC, and a number of subsidiaries, joint ventures and associates held directly or indirectly by Tesco PLC. See pages 117 to 121 for a complete list of Group entities.
Subsidiaries
The accounting year ends of the subsidiaries consolidated in these financial statements are on or around 27 February 2021.
Consolidated structured entities
The Group has a number of securitisation structured entities established in connection with Tesco Bank's credit card securitisation transactions. Although none of the equity of these entities is owned by the Group, the Group has rights to variable returns from its involvement with these entities and has the ability to affect those returns through its power over them under contractual agreements. As such, these entities are effectively controlled by the Group, and are therefore accounted for as subsidiaries of the Group.
These entities have financial year ends of 31 December. The management accounts of these entities are used to consolidate the results to 27 February 2021 within these financial statements.
Unconsolidated structured entities
In prior years, the Group sponsored a number of structured entities. The Group led the formation of the entities and its name appears in the name of the entities and/or on the debt issued by the entities. The structured entities were set up to finance property purchases by some of the UK property joint ventures in which the Group typically holds a 50% equity interest. The structured entities obtain debt financing from third-party investors and lend the funds to these joint ventures, who use the funds to purchase the properties.
The liabilities of the UK property joint ventures include the loans due to these structured entities. The Group's exposure to the structured entities is limited to the extent of the Group's interests in the joint ventures. The liabilities of the structured entities are non-recourse to the Group.
The Group concluded that it does not control, and therefore should not consolidate, these structured entities since it does not have power over the relevant activities of the structured entities, or exposure to variable returns from these entities.
Notes to the Group financial statements
Note 14 Group entities continued
Interests in joint ventures and associates
Principal joint ventures and associates
The Group's principal joint ventures and associates are:
Share of issued share capital, Nature loan capital Principal of and debt Country area relationship Business activity securities of incorporation of operation Included in 'UK property joint ventures': The Tesco Coral Limited Partnership Joint venture Property investment 50% England United Kingdom The Tesco Blue Limited Partnership Joint venture Property investment 50% England United Kingdom The Tesco Passaic Limited Partnership Joint venture Property investment 50% England United Kingdom The Tesco Navona Limited Partnership Joint venture Property investment 50% England United Kingdom The Tesco Sarum Limited Partnership Joint venture Property investment 50% England United Kingdom The Tesco Dorney Limited Partnership Joint venture Property investment 50% England United Kingdom The Tesco Arena Unit Trust Joint venture Property investment 50% Jersey United Kingdom Included in 'Other joint ventures and associates': Tesco Mobile Limited Joint venture Telecommunications 50% England United Kingdom Tesco Underwriting Limited Joint venture Insurance 49.9% England United Kingdom Booker India Private Limited Joint Venture Retail 49% India India Trent Hypermarket Private Limited Joint venture Retail 50% India India
The accounting period end dates of the joint ventures and associates consolidated in these financial statements range from 31 December 2020 to 27 February 2021. The accounting period end dates of joint ventures differ from those of the Group for commercial reasons and depend upon the requirements of the joint venture partner as well as those of the Group. The accounting period end dates of the associates are different from those of the Group as they depend upon the requirements of the parent companies of those entities.
There are no significant restrictions on the ability of joint ventures and associates to transfer funds to the parents, other than those imposed by the Companies Act 2006 or equivalent local regulations, and for Tesco Underwriting Limited, regulatory capital requirements.
Prior to the Group's sale of its 20% share in Gain Land Limited (Gain Land) on 28 February 2020, management applied judgement in determining that Gain Land was an associate of the Group. The Group had significant influence by virtue of holding 20% equity interest which presumed significant influence per IAS 28, together with having a contractual right to appoint two out of 10 directors, while taking into account that the remaining 80% interest was held by one other party.
The UK property joint ventures involve the Group partnering with third parties in carrying out some property investments in order to enhance returns from property and access funding, while reducing risks associated with sole ownership. These property investments generally cover shopping centres and standalone stores. The Group enters into leases for some or all of the properties held in the joint ventures. These leases provide the Group with some rights over alterations and adjacent land developments. Some leases also provide the Group with options to purchase the other joint venturers' equity stakes at a future point in time. In some cases the Group has the ability to substitute properties in the joint ventures with alternative properties of similar value, subject to strict eligibility criteria. In other cases, the Group carries out property management activities for third-party rentals of shopping centre units.
The property investment activities are carried out in separate entities, usually partnerships or limited liability companies. The Group has assessed its ability to direct the relevant activities of these entities and any impact on Group returns and concluded that the entities qualify as joint ventures since decisions regarding them require the unanimous consent of both equity holders. This assessment included not only rights within the joint venture agreements, but also any rights within other contractual arrangements between the Group and the entities.
The Group made a number of judgements in arriving at this determination, the key ones being:
- since the provisions of the joint venture agreements require the relevant decisions impacting investor returns to be either unanimously agreed by both joint venturers at the same time, or in some cases to be agreed sequentially by each venturer at different stages, there is joint decision-making within the joint venture;
- since the Group's leases are priced at fair value, and any rights embedded in the leases are consistent with market practice, they do not provide the Group with additional control over the joint ventures nor do they infer an obligation by the Group to fund the settlement of liabilities of the joint ventures;
- any options to purchase the other joint venturers' equity stakes are priced at market value, and only exercisable at future dates, hence they do not provide control to the Group at the current time;
- where the Group has a right to substitute properties in the joint ventures, the rights are strictly limited and are at fair value, hence do not provide control to the Group; and
- where the Group carries out property management activities for third-party rentals in shopping centres, these additional activities are controlled through joint venture agreements or lease agreements, and do not provide the Group with additional powers over the joint venture.
Notes to the Group financial statements
Note 14 Group entities continued
Summarised financial information for joint ventures and associates
The summarised financial information below reflects the amounts presented in the financial statements of the relevant joint ventures and associates, and not the Group's share of those amounts. These amounts have been adjusted to conform to the Group's accounting policies where required. The summarised financial information for UK property joint ventures has been aggregated in order to provide useful information to users without excessive detail, since these entities have similar characteristics and risk profiles largely based on their nature of activities and geographic market.
UK property joint Gain Land Limited ventures (d) 2021 2020 2021 2020 GBPm GBPm GBPm GBPm Summarised balance sheet Non-current assets (a) 2,916 3,242 - - Current assets (excluding cash and cash equivalents) 50 101 - - Cash and cash equivalents 27 28 - - Current liabilities (b) (420) (487) - - Non-current liabilities (b) (3,229) (3,621) - - Net assets/(liabilities) (656) (737) - - Summarised income statement Revenue 250 258 - 8,551
Profit/(loss) after tax - - - (95) Reconciliation to carrying amounts: Opening balance - - - 263 Foreign currency translation - - - (4) Share of profits/(losses) (c) 14 12 - (19) Dividends received from joint ventures and associates (14) (12) - - Disposals(d) - - - (240) Closing balance - - - - Group's share in ownership 50% 50% - - Group's share of net assets/(liabilities) (328) (369) - - Goodwill - - - - Deferred property profits offset against carrying amounts (60) (61) - - Cumulative unrecognised losses (c) 205 205 - - Cumulative unrecognised hedge reserves (c) 183 225 - - Carrying amount - - - -
(a) The non-current asset balances of UK property joint ventures are reflected at historical depreciated cost to conform to the Group's accounting policies. The aggregate fair values in the financial statements of the UK property joint ventures are GBP3,939m (2020: GBP4,338m).
(b) The current and non-current liabilities of UK property joint ventures largely comprise loan balances of GBP3,235m (2020: GBP3,616m) and derivative swap balances of GBP363m (2020: GBP452m) entered into to hedge the cash flow variability exposures of the joint ventures.
(c) The share of profit for the year for UK property joint ventures related to GBP14m dividends received from joint ventures with GBPnil carrying amounts. GBP 2m of profit and GBP12m of decrease i n the fair values of derivatives arising from these entities have been included in cumulative unrecognised losses and cumulative unrecognised hedge reserves respectively.
(d) The Group completed the sale of its 20% investment in Gain Land Limited on 28 February 2020 for a consideration of GBP277m.
As at 27 February 2021, the Group has GBP101m (2020: GBP106m) loans to UK property joint ventures.
Other joint ventures and associates
The Group also has interests in a number of individually immaterial joint ventures and associates excluding UK property joint ventures.
Joint ventures Associates 2021 2020 2021 2020 GBPm GBPm GBPm GBPm Aggregate carrying amount of individually immaterial joint ventures and associates 168 230 10 77 Group's share of profits/(losses) for the year* 1 2 11 (3)
* Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.
Note 15 Impairment of non-current assets
Impairment losses and reversals
An impairment of GBP295m was recognised on the goodwill associated with Tesco Bank (2020: GBPnil). This impairment arises due to an increase in the cost of equity used to discount cash flows and a reduction in cash flows arising from the economic impact of the pandemic. No other goodwill impairment losses were recognised by the Group (2020: GBPnil).
The table below summarises the Group's pre-tax impairment losses and reversals on other non-current assets and investments in joint ventures and associates, with the former aggregated by segment due to the large number of individually immaterial store cash-generating units. This includes any losses recognised immediately prior to classifying an asset or disposal group as held for sale but excludes all impairments post classification as held for sale. Impairment losses and reversals comparatives have been re-presented in order to show the Group's Poland, Thailand and Malaysia businesses as discontinued operations. There were no impairment losses or reversals in the year (2020: GBPnil) with respect to other non-current assets and investments in joint ventures and associates in Tesco Bank.
Notes to the Group financial statements
Note 15 Impairment of non-current assets continued
Total continuing Discontinued UK & ROI Central Europe operations operations Total(a) Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment 52 weeks ended loss reversal loss reversal loss reversal loss reversal loss reversal 27 February 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm Group balance sheet Other intangible assets (32) 9 (2) 7 (34) 16 - - (34) 16 Property, plant and equipment (371) 497 (23) 38 (394) 535 (66) 23 (460) 558 Right of use assets (209) 229 (16) 1 (225) 230 - - (225) 230 Investment property (2) 2 - - (2) 2 - - (2) 2 Other non-current assets (614) 737 (41) 46 (655) 783 (66) 23 (721) 806 Investments in joint ventures and associates - - - - - - - - - - Total impairment (loss)/reversal (614) 737 (41) 46 (655) 783 (66) 23 (721) 806 Group income statement Cost of sales - underlying (2) - - - (2) - - - (2) - Cost of sales - exceptional (564) 683 (41) 46 (605) 729 - - (605) 729 Administrative expenses - underlying (48) 54 - - (48) 54 - - (48) 54 Administrative expenses - exceptional - - - - - - - - - - Total impairment (loss)/ reversal from continuing operations (614) 737 (41) 46 (655) 783 - - (655) 783 Discontinued operations - underlying - - - - - - - - - - Discontinued operations - exceptional - - - - - - (66) 23 (66) 23 Total impairment (loss)/reversal (614) 737 (41) 46 (655) 783 (66) 23 (721) 806
(a) Of the GBP85m other non-current assets net impairment reversal for the Group (2020: GBP302m loss), a net reversal of GBP81m (2020: GBP302m loss) has been classified within exceptional items, of which a net reversal of GBP119m (2020: GBP251m loss) related to the UK & ROI, a net reversal of GBP5m (2020: GBP28m reversal) related to Central Europe and a net loss of GBP43m (2020: GBP79m loss) related to discontinued operations.
Total continuing Discontinued UK & ROI Central Europe operations operations Total(a)(b) Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment Impairment 53 weeks ended loss reversal loss reversal loss reversal loss reversal loss reversal 29 February 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm Group balance sheet Other intangible assets (27) 36 - - (27) 36 - 2 (27) 38 Property, plant and equipment (428) 272 (54) 67 (482) 339 (240) 156 (722) 495 Right of use assets (242) 142 (2) 18 (244) 160 (23) 22 (267) 182 Investment property (5) - - 2 (5) 2 - 2 (5) 4 Other non-current assets (702) 450 (56) 87 (758) 537 (263) 182 (1,021) 719 Investments in joint ventures and associates (47) - - - (47) - - - (47) - Total impairment (loss)/reversal (749) 450 (56) 87 (805) 537 (263) 182 (1,068) 719 Group income statement Cost of sales - underlying - - (5) 8 (5) 8 - - (5) 8 Cost of sales - exceptional (658) 407 (51) 75 (709) 482 - - (709) 482 Administrative expenses -
underlying (44) 43 - - (44) 43 - - (44) 43 Administrative expenses - exceptional (47) - - 4 (47) 4 - - (47) 4 Total impairment (loss)/ reversal from continuing operations (749) 450 (56) 87 (805) 537 - - (805) 537 Discontinued operations - underlying - - - - - - (2) - (2) - Discontinued operations - exceptional - - - - - - (261) 182 (261) 182 Total impairment (loss)/reversal (749) 450 (56) 87 (805) 537 (263) 182 (1,068) 719 (a) Refer to previous table for footnote.
(b) Comparatives have been re-presented to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.
Notes to the Group financial statements
Note 15 Impairment of non-current assets continued
The net impairment reversal in UK & ROI includes an impairment loss of GBP32m in the UK in respect of the Group obtaining control of The Tesco Property (No. 2) Limited Partnership (2020: GBP287m impairment loss in the UK & ROI in respect of the Group obtaining control of The Tesco Atrato Limited Partnership). Refer to Note 33 for further details.
Immediately preceding their recognition as held for sale in H1 2020/21, an impairment review was carried out on the Group's Poland, Malaysia and Thailand operations. There were no significant changes in relation to the Malaysia and Thailand operations between the 2020 year end and reclassification as held for sale, and expected proceeds exceeded the carrying value so no impairment was required. The Poland disposal involves both a corporate sale and the separate sale of the remaining property assets. Expected proceeds for the corporate sale exceeded the carrying value so no impairment was required. The recoverable amount of the remaining property assets is based on fair value less costs of disposal on an asset by asset basis, such that some assets are impaired while others have an impairment reversal. This results in a net impairment charge of GBP43m, recognised in discontinued operations - exceptional. See Note 7 for further details.
The remaining Other non-current assets impairment losses and reversals for the Group largely reflect normal fluctuations expected from store-level performance, property fair values and changes in discount rates, as well as any specific store closures.
Net carrying value of non-current assets
The net carrying values of Other non-current assets and recoverable amounts of impaired Other non-current assets for which an impairment loss has been recognised or reversed have been aggregated by segment due to the large number of individually immaterial store cash-generating units. The amounts below exclude assets or disposal groups classified as held for sale.
UK & Central Tesco ROI Europe Bank Total At 27 February 2021 GBPm GBPm GBPm GBPm Net carrying value Other intangible assets 959 32 131 1,122 Property, plant and equipment 15,379 1,767 65 17,211 Right of use assets 5,571 368 12 5,951 Investment property 18 1 - 19 Other non-current assets 21,927 2,168 208 24,303 Goodwill (a) 3,791 - 480 4,271 Investments in joint ventures and associates (b) 84 1 93 178 Net carrying value of non-current assets 25,802 2,169 781 28,752 Recoverable amount of impaired Other non-current assets for which an impairment loss has been recognised or reversed, supported by: Value in use 2,555 152 - 2,707 Fair value less costs of disposal (c) 1,400 122 - 1,522 3,955 274 - 4,229
(a) Goodwill of GBP4,271m (2020: GBP4,840m) consists of UK GBP3,789m (2020: GBP3,793m), ROI GBP2m (2020: GBP3m) and Tesco Bank GBP480m (2020: GBP775m) included within continuing operations and GBPnil (2020: Thailand GBP193m and Malaysia GBP76m) in discontinued operations.
(b) The carrying value of the Group's investments include: Trent Hypermarket Private Limited GBP53m (2020: GBP59m) and Tesco Underwriting Limited GBP93m (2020: GBP87m).
(c) Due to the individual nature of each property, fair values are classified as Level 3 within the fair value hierarchy.
Total Central Tesco continuing Discontinued At 29 February 2020 (restated UK & ROI Europe Bank operations operations Total (d) ) GBPm GBPm GBPm GBPm GBPm GBPm Net carrying value Other intangible assets 1,055 25 139 1,219 19 1,238 Property, plant and equipment 14,612 1,824 61 16,497 2,737 19,234 Right of use assets 5,719 392 14 6,125 749 6,874 Investment property 23 2 - 25 1 26 Other non-current assets 21,409 2,243 214 23,866 3,506 27,372 Goodwill (a) 3,796 - 775 4,571 269 4,840 Investments in joint ventures and associates (b) 70 1 87 158 149 307 Net carrying value of non-current assets 25,275 2,244 1,076 28,595 3,924 32,519 Recoverable amount of impaired Other non-current assets for which an impairment loss has been recognised or reversed, supported by: Value in use 3,448 178 - 3,626 239 3,865 Fair value less costs of disposal (c) 2,105 126 - 2,231 352 2,583 5,553 304 - 5,857 591 6,448
(a)-(c) Refer to previous table for footnotes.
(d) Refer to Note 1 for further details regarding the prior year restatement.
Notes to the Group financial statements
Note 15 Impairment of non-current assets continued
Impairment methodology
Cash-generating units
The Group treats each store as a separate cash-generating unit for impairment testing of other intangible assets, property, plant and equipment, right of use assets and investment property. Refer to Note 1 for further details. The Group allocates goodwill to groups of cash-generating units, where each country represents a group of cash-generating units for the Group's retail operations, as this represents the lowest level at which goodwill is monitored by management. Tesco Bank represents a separate cash-generating unit.
The recoverable amount of each store cash-generating unit is the higher of its value in use and its fair value less costs of disposal. The recoverable amount of a group of cash-generating units to which goodwill has been allocated is determined based on value in use calculations.
Head office and central assets such as distribution centres and associated costs are allocated to store cash-generating units based on level of use, estimated with reference to sales. Urban fulfilment centres and associated costs that are part of a store are included in the store cash- generating unit. Standalone customer fulfilment centres and associated costs are each treated as a separate cash-generating unit from the current financial year due to the evolution of the online channel that these centres support, rather than being allocated to the stores in their vicinity.
Value in use
Retail
Estimates for value in use calculations include discount rates, long-term growth rates, expected changes to future cash flows, including volumes and prices, and the probabilities assigned to cash flow scenarios. Estimates are based on past experience and expectations of future changes in the market, including the prevailing economic climate and global economy, competitor activity, market dynamics, changing customer behaviours, structural challenges facing retail and the resilience afforded by the Group's operational scale.
Cash flow projections are based on the Group's three-year internal forecasts, the results of which are reviewed by the Board. The forecasts are extrapolated to five years based on management's expectations, and beyond five years based on estimated long-term average growth rates. Long-term growth rates for the Retail business are based on inflation forecasts by recognised bodies.
In the current year, the Group applies an expected cash flow approach by probability-weighting different cash flow scenarios. The greatest probability weighting is applied to the cash flows derived from the three-year internal forecasts. Additional scenarios take account of the risks presented by Brexit, COVID-19, a macro-economic downturn and climate change consistent with the viability statement scenarios (see 'Longer-term viability statement' in the Strategic Report) as well as an upside scenario.
Management estimates discount rates using pre-tax rates that reflect the market assessment as at the balance sheet date of the time value of money and the risks specific to the cash-generating units. The pre-tax discount rates are derived from the Group's post-tax weighted average cost of capital, as adjusted for the specific risks relating to each geographical region. Risk-free rates are based on government bond rates in each geographical region and equity risk premia are based on forecasts by recognised bodies. In the current year the risks associated with Brexit and COVID-19 are reflected in the probability-weighted cash flow scenarios, and hence the discount rate is no longer adjusted for these risks.
Tesco Bank goodwill
Tesco Bank value in use is calculated by discounting equity cash flows, defined as the excess above the regulatory requirement. Tesco Bank applies an expected cash flow approach, using the internal three-year forecasts, approved by the Board, as well as stressed scenarios in line with those used to measure expected credit losses (refer to Note 25) to form a probability-weighted cash flow. The long-term growth rate is based on inflation and GDP growth forecasts by recognised bodies. The discount rate is the cost of equity of Tesco Bank. Risk-free rates and equity risk premia are derived from recognised bodies.
Fair value less costs of disposal
Fair values of owned properties are determined with regard to the market rent for the stores or for alternative uses with investment yields appropriate to reflect the physical characteristics of the property, location, infrastructure, redevelopment potential and other factors. In some cases, fair values include residual valuations where stores may be viable for redevelopment. Fair values of leased properties are determined with regard to the discounted market rent for the property over the remaining period of the lease, reflecting the condition and location of the property and the local rental market, adjusted for a suitable void period. Fair values of the Group's properties were determined with the assistance of independent professional valuers where appropriate. Costs of disposal are estimated based on past experience in each geographical region.
Investments in joint ventures and associates
The recoverable values of investments in joint ventures and associates are estimated taking into account forecast cash flows, equity valuations of comparable entities and/or recent transactions for comparable businesses.
Notes to the Group financial statements
Note 15 Impairment of non-current assets continued
Key assumptions and sensitivity
Key assumptions
For value in use calculations, the key assumptions to which the recoverable amounts are most sensitive are discount rates, long-term growth rates, the impact on cash generated from operations from year one sales growth (incorporating sales and costs, as well as volumes and prices) and probabilities assigned to cash flow scenarios. For fair value less costs of disposal calculations, the key assumption is property fair values.
The discount rates and long-term growth rates for each group of cash-generating units to which goodwill has been allocated are:
UK ROI Tesco Bank 2021 2020 2021 2020 2021 2020 % % % % % % Pre-tax discount rates 5.9 8.0 5.4 8.1 12.8 9.7 Post-tax discount rates 4.8 6.6 4.7 7.1 10.4 7.2 Long-term growth rates 1.9 2.0 1.9 1.9 1.6 1.8
The discount rates and long-term growth rates for the Group's portfolio of store cash-generating units, aggregated by segment due to the large number of individually immaterial store cash-generating units, are:
UK & ROI Central Europe 2021 2020 2021 2020 % % % % 5.4 - 8.0 - 5.5 - 7.0 - Pre-tax discount rates 5.9 8.1 8.3 9.3 4.7 - 6.6 - 4.4 - 5.5 - Post-tax discount rates 4.8 7.1 7.6 8.3 1.9 - 2.0 - 2.0 - Long-term growth rates 1.9 2.0 3.0 3.0
Sensitivity
The Group has carried out sensitivity analyses on the reasonably possible changes in key assumptions in the impairment tests for (a) each group of cash-generating units to which goodwill has been allocated and (b) for its portfolio of store cash-generating units.
(a) With the exception of Tesco Bank, which has been impaired in the current year, neither a reasonably possible one percentage point increase in discount rates, a one percentage point decrease in year one sales growth nor a one percentage point decrease in long-term growth rates would indicate impairment (or further impairment), in any group of cash-generating units to which goodwill has been allocated.
The table below summarises the reasonably possible changes in key assumptions to which Tesco Bank goodwill is most sensitive and their impact on impairment in the current year:
Reasonably possible Impact on 2021 Key assumption change impairment GBPm Cost of equity Increase of 1.0%pt Increase (203) Annual equity cash flows Decrease of 5.0% Increase (107) Long-term growth rates Decrease of 0.5%pt Increase (27)
(b) While there is not a significant risk of an adjustment to the carrying amount of any one store cash-generating unit that would be material to the Group as a whole in the next financial year, the table below summarises the reasonably possible changes in each key assumption and its impact on the impairment of the Group's entire portfolio of store cash-generating units, presented in aggregate due to the large number of individually immaterial store cash-generating units:
Impact on 2021 2020 Key assumption Reasonably possible change impairment GBPm GBPm Post-tax discount Increase of 1.0%pt for each rates geographic region Increase (438) (482) Decrease of 1.0%pt for each geographic region Decrease 397 485 Increase of 1.0%pt for each Year one sales growth geographic region Decrease 55 61 Decrease of 1.0%pt for each geographic region Increase (56) (61) Long-term growth Increase of 1.0%pt for each rates geographic region Decrease 304 445 Decrease of 1.0%pt for each geographic region Increase (308) (410) Increase of 5.0% for each Property fair values geographic region Decrease 81 105 Decrease of 5.0% for each geographic region Increase (80) (105)
The probability applied to each cash flow scenario in the current year differs by country, depending on the expected likelihood of each scenario occurring in each country. The base case represents the cash flows derived from the three-year internal forecasts and is assigned a weighted average probability of 60%. The impairment is not highly sensitive to the upside and climate change scenarios, assigned 5% and 4% weighted average probabilities respectively. The table below sets out the weighted average probability assigned to each of the remaining scenarios, to which the impairment is most sensitive, and shows the impact on impairment of a reasonably possible change in probability for each scenario, where the corresponding opposite change in probability is applied to the base case.
Weighted average Impact on 2021 Scenario probability Reasonably possible change impairment GBPm Increase of 5.0%pt for Brexit 11% each geographic region Increase (59) Decrease of 5.0%pt for each geographic region Decrease 60 Increase of 5.0%pt for COVID-19 10% each geographic region Increase (28) Decrease of 5.0%pt for each geographic region Decrease 29 Macro-economic Increase of 5.0%pt for downturn 10% each geographic region Increase (80) Decrease of 5.0%pt for each geographic region Decrease 81
Notes to the Group financial statements
Note 16 Investments in debt and equity instruments
Financial assets at fair value through other comprehensive income
2021 2020 GBPm GBPm Investments in debt instruments (a) - 1,058 Investments in equity instruments 14 10 Total financial assets at fair value through other comprehensive income 14 1,068 Of which: Current 3 202 Non-current 11 866 14 1,068
Investment securities at amortised cost
2021 2020 GBPm GBPm Investment securities at amortised cost (a) 928 - Expected credit loss allowance (b) (1) - 927 -
Of which:
Current 175 - Non-current 752 - 927 - (a) Refer to Note 1 for more information regarding the change in business model. (b) Refer to Note 25 for allowance for expected credit losses disclosures.
On 1 March 2020, following a change in business model, the Group's GBP1,058m portfolio of debt investments measured at fair value through other comprehensive income was reclassified to investment securities at amortised cost (see Note 1) and the GBP3m cumulative loss relating to these assets, previously recognised in other comprehensive income, was adjusted against the carrying value of the assets. See Note 24 for the fair value of these assets as at 27 February 2021. A fair value gain of GBP8m would have been recognised in other comprehensive income in the current year had the financial assets not been reclassified.
Note 17 Inventories
2021 2020 GBPm GBPm Goods held for resale 2,066 2,429 Development properties 3 4 2,069 2,433
Goods held for resale are net of commercial income. Refer to Note 22.
Cost of inventories from continuing operations recognised as an expense for the 52 weeks ended 27 February 2021 was GBP42,482m (53 weeks ended 29 February 2020: GBP42,782m). Inventory losses and provisions recognised as an expense for the 52 weeks ended 27 February 2021 were GBP1,052m
(53 weeks ended 29 February 2020: GBP1,121m).
Note 18 Trade and other receivables
2021 2020 GBPm GBPm Trade receivables 424 495 Prepayments 207 192 Accrued income (a) 210 262 Other receivables 430 439 Amounts owed by joint ventures and associates (Note 31) (b) 162 174 Total trade and other receivables 1,433 1,562 Of which: Current 1,263 1,396 Non-current 170 166 1,433 1,562
(a) Accrued income includes contract assets of GBP52m (2020: GBP60m) primarily related to insurance renewal income. The expected credit loss was immaterial as at 27 February 2021 (2020: immaterial).
(b) Expected credit losses on amounts owed by joint ventures and associates are not material.
Trade receivables include commercial income. Refer to Note 22. Trade receivables are generally non-interest-bearing. Credit terms vary by country and the nature of the debt, ranging from seven to 60 days.
Notes to the Group financial statements
Note 18 Trade and other receivables continued
The tables below present the ageing of receivables and related allowances for expected credit losses:
Greater Up to Six to than Not past six months 12 months 12 months due past due past due past due Total At 27 February 2021 GBPm GBPm GBPm GBPm GBPm Trade receivables 403 54 3 11 471 Other receivables 413 15 5 19 452 Trade and other receivables 816 69 8 30 923 Allowance for expected credit losses: At the beginning of the year (7) (9) (8) (30) (54) Transfer to disposal group held for sale - 1 1 4 6 Foreign currency translation (1) - - - (1) Increase in allowance, net of recoveries, charged to the Group income statement (14) (4) - (6) (24) Amounts written off - 1 1 2 4 At the end of the year (22) (11) (6) (30) (69) Greater Up to Six to than Not past six months 12 months 12 months due past due past due past due Total At 29 February 2020 GBPm GBPm GBPm GBPm GBPm Trade receivables 438 70 6 15 529 Other receivables 431 7 4 17 459 Trade and other receivables 869 77 10 32 988 Allowance for expected credit losses: At the beginning of the year (5) (11) (14) (29) (59) Foreign currency translation - 1 - - 1 Increase in allowance, net of recoveries, charged to the Group income statement (2) - 4 (3) (1) Amounts written off - 1 2 2 5 At the end of the year (7) (9) (8) (30) (54)
Note 19 Loans and advances to customers and banks
Tesco Bank has loans and advances to customers and banks, as follows:
2021 2020 GBPm GBPm Loans and advances to customers 6,402 8,451 Loans and advances to banks - - 6,402 8,451 Of which: Current 3,093 4,280 Non-current 3,309 4,171 6,402 8,451
The maturity of these loans and advances is as follows:
2021 2020 GBPm GBPm Repayable on demand or at short notice 3 4 Within three months 3,354 4,543 Greater than three months but less than one year 94 86 Greater than one year but less than five years 2,922 3,322 After five years 654 984 7,027 8,939 Expected credit loss allowance for loans and advances to customers and banks (625) (488) 6,402 8,451
At 27 February 2021, GBP3.0bn (2020: GBP3.5bn) of the credit card portfolio had its beneficial interest assigned to a securitisation structured entity, Delamare Cards Receivables Trustee Limited, for use as collateral in securitisation transactions. The total encumbered portion of this portfolio is GBPnil (2020: GBP0.8bn).
At 27 February 2021, Delamare Cards MTN Issuer PLC had GBP1.8bn (2020: GBP2.0bn) notes in issue in relation to securitisation transactions, of which GBPnil (2020: GBP0.6bn) was externally issued. The Group owned GBP1.5bn (2020: GBP1.4bn) class A credit card-backed notes and GBP0.3bn (2020: GBP0.2bn) class D credit card-backed notes.
All of the GBP1.5bn (2020: GBP1.2bn) class A retained Credit Card backed notes are held within a single collateral pool.
Fair value hedge adjustments
Fair value hedge adjustments amounting to GBP6.7m (2020: GBP9.7m) are in respect of fixed rate loans. These adjustments are largely offset by derivatives, which are used to manage interest rate risk and are designated as fair value hedges within loans and advances to customers.
Refer to Note 25 for allowance for expected credit losses disclosures.
Notes to the Group financial statements
Note 20 Cash and cash equivalents and short-term investments
Cash and cash equivalents
2021 2020* GBPm GBPm Cash at bank and in hand 2,495 3,980 Short-term deposits 15 157 Cash and cash equivalents in the Group balance sheet 2,510 4,137 Bank overdrafts (532) (1,106) Cash and cash equivalents in the Group cash flow statement 1,978 3,031
* Refer to Note 1 for further details regarding the prior year restatement in relation to notional cash pooling arrangements.
Short-term investments
2021 2020 GBPm GBPm Money market funds 1,011 1,076
Cash and cash equivalents includes GBP101m (2020: GBP35m) of restricted amounts mainly relating to the Group's pension schemes and employee
benefit trusts.
Note 21 Trade and other payables
2021 2020 GBPm GBPm Trade payables 5,131 5,579 Other taxation and social security 369 477 Other payables 1,653 1,793 Amounts payable to joint ventures and associates (Note 31) 23 26 Accruals 956 841 Contract liabilities 376 376 Total trade and other payables 8,508 9,092 Of which: Current 8,399 8,922 Non-current 109 170 8,508 9,092
Trade and other payables are net of commercial income. Refer to Note 22.
Contract liabilities represent consideration received for performance obligations not yet satisfied, predominantly in relation to Clubcard points.
The majority of the revenue deferred at the current financial year end will be recognised in the following financial year.
Trade payables include GBP572m (2020: GBP393m) that suppliers have chosen to early-fund under supplier financing arrangements. Refer to Note 1. Amounts in trade payables that are overdue for payment to the provider are immaterial.
Note 22 Commercial income
Below are the commercial income balances included within inventories and trade and other receivables, or netted against trade and
other payables. Amounts received in advance of income being earned are included in accruals.
2021 2020 GBPm GBPm Current assets Inventories (24) (55) Trade and other receivables Trade/other receivables 90 138 Accrued income 125 157 Current liabilities Trade and other payables Trade payables 170 292 Accruals (2) (3)
Notes to the Group financial statements
Note 23 Borrowings
Borrowings are classified as current and non-current based on their scheduled redemption date, and not their maturity date. Repayments of principal amounts are classified as current if the repayment is scheduled to be made within one year of the balance sheet date.
2021 2020 (k) Par value Maturity GBPm GBPm Bank loans and overdrafts (a) - - 559 1,142 2.125% MTN EUR296m Nov 2020 - 255 1m USD LIBOR + 0.70% Tesco Bank Bond $350m Nov 2020 - 273 5% Tesco Bank Retail Bond GBP200m Nov 2020 - 202 6.125% MTN GBP417m Feb 2022 417 416 LIBOR + 0.53% Tesco Bank Bond GBP300m Oct 2022 - 299 5% MTN (b) GBP71m Mar 2023 79 103 1.375% MTN EUR750m Oct 2023 662 660 2.5% MTN (b) EUR473m Jul 2024 415 653 2.5% MTN GBP400m May 2025 417 418 3.5% Tesco Bank Senior MREL Notes (h) GBP250m Jul 2025 251 250 3.322% LPI MTN (i) GBP354m Nov 2025 364 358 0.875% MTN EUR750m May 2026 649 640 5.5457% Secured Bond (c)(d) GBP289m Feb 2029 275 303 6.067% Secured Bond (c) GBP200m Feb 2029 193 192 LIBOR + 1.2% Secured Bond (c) GBP50m Feb 2029 48 36 0.375% MTN EUR750m Jul 2029 625 - 6% MTN (b) GBP38m Dec 2029 45 58 2.75% MTN GBP450m Apr 2030 441 - LIBOR + 1.17% Secured Bond (f)(l) GBP187m Jan 2032 184 - LIBOR + 1.17% Secured Bond (f) GBP108m Jan 2032 100 - 5.5% MTN (b) GBP67m Jan 2033 80 133 1.982% RPI MTN (j) GBP294m Mar 2036 302 297 6.15% USD Bond (b) $355m Nov 2037 333 555 6.0517% Secured Bond (e)(g) GBP458m Oct 2039 592 616 4.875% MTN (b) GBP14m Mar 2042 14 20 5.125% MTN (b) EUR235m Apr 2047 209 316 5.2% MTN (b) GBP14m Mar 2057 14 29 7,268 8,224 Of which: Current 1,080 2,219 Non-current 6,188 6,005 7,268 8,224
(a) Bank loans and overdrafts includes GBP532m (2020: GBP1,106m) of bank overdrafts. GBP525m (2020: GBP979m) is held under a notional pooling arrangement which does not meet the criteria to be presented net of cash on the balance sheet. Refer to Note 20.
(b) During the year, the Group undertook a tender for outstanding bonds and as a result the following notional amounts were repaid early, 5% MTN Mar 2023 GBP22m, 2.5% MTN Jul 2024 EUR277m, 6% MTN Dec 2029 GBP10m, 5.5% MTN Jan 2033 GBP42m, 6.15% USD Bond Nov 2037 $170m, 4.875% MTN Mar 2042 GBP6m, 5.125% MTN Apr 2047 EUR121m and 5.2% MTN Mar 2057 GBP16m.
(c) The bonds are secured by a charge over the property, plant and equipment held within The Tesco Property Limited Partnership, a 100% owned subsidiary of Tesco PLC. The carrying amounts of assets pledged as security for secured bonds is GBP817m (29 February 2020: GBP794m).
(d) This is an amortising bond which matures in Feb 2029. GBP26m (29 February 2020: GBP22m) is the principal repayment due within the next 12 months. The remainder is payable in quarterly instalments until maturity in Feb 2029.
(e) These bonds is secured by a charge over the property, plant and equipment held within The Tesco Atrato Limited Partnership, a 100% owned subsidiary of Tesco PLC. The carrying amounts of assets pledged as security for secured bonds is GBP837m (29 February 2020 GBP612m).
(f) These bonds are secured by a charge over the property, plant and equipment held within The Tesco Property No. 2 Limited Partnership, a 100% owned subsidiary of Tesco PLC. The carrying amounts of assets pledged as security for secured bonds is GBP445m.
(g) This is an amortising bond which matures in October 2039. GBP14m is the principal repayment due within the next 12 months. The remainder is payable in quarterly instalments until maturity in Oct 2039.
(h) These notes are Tesco Bank MREL compliant senior debt and were issued on 25 July 2019. The scheduled redemption date is July 2024.
(i) The 3.322% Limited Price Inflation (LPI) MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN. The maximum indexation of the principal in any one year is 5%, with a minimum of 0%.
(j) The 1.982% RPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN.
(k) Refer to Note 1 for further details regarding the prior year restatement.
(l) This is an amortising bond which matures in January 2032 GBP9m is the principal repayment due within the next 12 months. The remainder is payable in quarterly instalments until maturity in Jan 2032.
Notes to the Group financial statements
Note 24 Financial instruments
The Group recognises the following financial instruments on its balance sheet. The Group's exposure to the risks associated with its financial assets and liabilities is discussed in Note 25.
At fair value At fair through value through At amortised profit other comprehensive cost or loss income Total At 27 February 2021 Notes GBPm GBPm GBPm GBPm Financial assets Cash and cash equivalents 20 2,496 14 - 2,510 Short-term investments 20 1,011 - - 1,011 Trade receivables 18 424 - - 424 Other receivables 18 430 - - 430 Joint ventures and associates loan receivables 31 122 - - 122 Loans and advances to customers - Tesco Bank 19 6,402 - - 6,402 Investment securities at amortised cost 16 927 - - 927 Financial assets at fair value through other comprehensive income 16 - - 14 14 Derivative financial instruments: Interest rate swaps - 42 - 42 Cross-currency swaps - 298 - 298 Index-linked swaps - 1,080 - 1,080 Forward contracts - 42 - 42 11,812 1,476 14 13,302 Financial liabilities Trade payables 21 (5,131) - - (5,131)
Other payables 21 (1,653) - - (1,653) Borrowings 23 (7,268) - - (7,268) Customer deposits - Tesco Bank 26 (5,738) - - (5,738) Deposits from banks - Tesco Bank 26 (600) - - (600) Lease liabilities 12 (8,402) - - (8,402) Derivative financial instruments: Interest rate swaps - (162) - (162) Cross-currency swaps - (38) - (38) Index-linked swaps - (729) - (729) Forward contracts - (78) - (78) (28,792) (1,007) - (29,799) At fair value At fair through value through At amortised profit other comprehensive costs or loss income Total At 29 February 2020 (restated)* Notes GBPm GBPm GBPm GBPm Financial assets Cash and cash equivalents 20 4,111 26 - 4,137 Short-term investments 20 1,076 - - 1,076 Trade receivables 18 495 - - 495 Other receivables 18 439 - - 439 Joint ventures and associates loan receivables 31 127 - - 127 Loans and advances to customers - Tesco Bank 19 8,451 - - 8,451 Investment securities at amortised cost 16 - - - - Financial assets at fair value through other comprehensive income 16 - - 1,068 1,068 Derivative financial instruments: Interest rate swaps - 47 - 47 Cross-currency swaps - 497 - 497 Index-linked swaps - 541 - 541 Forward contracts - 61 - 61 14,699 1,172 1,068 16,939 Financial liabilities Trade payables 21 (5,579) - - (5,579) Other payables 21 (1,793) - - (1,793) Borrowings 23 (8,224) - - (8,224) Customer deposits - Tesco Bank 26 (7,707) - - (7,707) Deposits from banks - Tesco Bank 26 (500) - - (500) Lease liabilities 12 (9,566) - - (9,566) Derivative financial instruments: Interest rate swaps - (70) - (70) Cross-currency swaps - - - - Index-linked swaps - (816) - (816) Forward contracts - (62) - (62) (33,369) (948) - (34,317)
* Refer to Note 1 for further details regarding the prior year restatement.
Notes to the Group financial statements
Note 24 Financial instruments continued
The fair values are determined by reference to prices available from the markets on which the instruments are traded, where they are available. Where market prices are not available, the fair value is calculated by discounting expected future cash flows at prevailing interest rates. The fair value of assets measured at amortised cost is shown below.
The expected maturity of financial assets and liabilities is not considered to be materially different to their current and non-current classification.
Fair value of financial assets and liabilities measured at amortised cost
The fair value of financial assets and liabilities measured at amortised cost is shown below. The table excludes cash and cash equivalents, short-term investments, trade receivables/payables, and other receivables/payables where the carrying values approximate fair value.
2020 (restated(a) 2021 ) Carrying Fair Carrying Fair value value value value GBPm GBPm GBPm GBPm Financial assets measured at amortised cost Loans and advances to customers - Tesco Bank (Level 3) 6,402 6,618 8,451 8,672 Investment securities at amortised cost (Level 1 and 2) 927 932 - - Joint ventures and associates loan receivables(b) (Level 2) 122 153 127 193 Financial liabilities measured at amortised cost Borrowings Amortised cost (Level 1 and 2) (4,711) (5,761) (5,793) (6,371) Bonds in fair value hedge relationships (Level 1) (2,557) (2,658) (2,431) (2,432) Customer deposits - Tesco Bank (Level 3) (5,738) (5,744) (7,707) (7,711) Deposits from banks - Tesco Bank (Level 2) (600) (600) (500) (500) (a) Refer to Note 1 for further details regarding the prior year restatement.
(b) Joint ventures and associates loan receivables carrying amounts of GBP122m (2020: GBP127m) are presented in the Group balance sheet net of deferred profits of GBP38m (2020: GBP54m) historically arising from the sale of property assets to joint ventures.
Fair value measurement by level of fair value hierarchy
The following table presents the Group's financial assets and liabilities that are measured at fair value, by level of fair value hierarchy:
- quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);
- inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and
- inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).
Level Level 1 Level 2 3 Total At 27 February 2021 GBPm GBPm GBPm GBPm Assets Financial assets at fair value through other comprehensive income - 3 11 14 Cash and cash equivalents at fair value through profit or loss - 14 - 14 Derivative financial instruments: Interest rate swaps - 42 - 42 Cross-currency swaps - 298 - 298 Index-linked swaps - 1,080 - 1,080 Forward contracts - 42 - 42 Total assets - 1,479 11 1,490 Liabilities Derivative financial instruments: Interest rate swaps - (162) - (162) Cross-currency swaps - (38) - (38) Index-linked swaps - (729) - (729) Forward contracts - (78) - (78) Total liabilities - (1,007) - (1,007) Net assets/(liabilities) - 472 11 483
Notes to the Group financial statements
Note 24 Financial instruments continued
Level Level 1 Level 2 3 Total At 29 February 2020 GBPm GBPm GBPm GBPm Assets Financial assets at fair value through other comprehensive income 1,058 - 10 1,068 Cash and cash equivalents at fair value through profit or loss - 26 - 26 Derivative financial instruments: Interest rate swaps - 47 - 47 Cross-currency swaps - 497 - 497 Index-linked swaps - 541 - 541 Forward contracts - 61 - 61 Total assets 1,058 1,172 10 2,240 Liabilities Derivative financial instruments: Interest rate swaps - (70) - (70) Index-linked swaps - (816) - (816) Forward contracts - (62) - (62)
Total liabilities - (948) - (948) Net assets/(liabilities) 1,058 224 10 1,292
The following table presents the changes in Level 3 instruments:
2021 2020 GBPm GBPm At the beginning of the year 10 (1) Gains/(losses) recognised in the Group statement of comprehensive income/(loss) 3 1 Disposal of financial instrument at fair value through profit or loss (4) 6 Addition of financial asset at fair value through other comprehensive income 2 4 At the end of the year 11 10
During the financial year, there were no transfers (2020: no transfers) between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements (2020: no transfers).
Offsetting of financial assets and liabilities
The following tables show those financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements.
Related amounts not offset in the Group balance sheet Gross amounts of financial Gross assets/ amounts (liabilities) Net amounts of offset presented recognised in the in the financial Group Group assets/ balance balance Financial (liabilities) sheet sheet instruments Collateral Net amount At 27 February 2021 GBPm GBPm GBPm GBPm GBPm GBPm Financial assets Derivative financial instruments 1,462 - 1,462 (234) - 1,228 Trade receivables 520 (96) 424 - - 424 Total assets 1,982 (96) 1,886 (234) - 1,652 Financial liabilities Derivative financial instruments (1,007) - (1,007) 234 42 (731) Trade payables (5,227) 96 (5,131) - - (5,131) Total liabilities (6,234) 96 (6,138) 234 42 (5,862)
Notes to the Group financial statements
Note 24 Financial instruments continued
Related amounts not offset in the Group balance sheet Gross amounts of financial Gross assets/ amounts (liabilities) Net amounts of offset presented recognised in the in the financial Group Group At 29 February 2020 assets/ balance balance Financial (restated(a) (liabilities) sheet sheet instruments Collateral Net amount ) GBPm GBPm GBPm GBPm GBPm GBPm Financial assets Derivative financial instruments 1,146 - 1,146 (168) - 978 Trade receivables 735 (240) 495 - - 495 Total assets 1,881 (240) 1,641 (168) - 1,473 Financial liabilities Derivative financial instruments (948) - (948) 168 45 (735) Trade payables (5,819) 240 (5,579) - - (5,579) Total liabilities (6,767) 240 (6,527) 168 45 (6,314)
(a) Refer to Note 1 for further details regarding the prior year restatement.
For the financial assets and liabilities subject to enforceable master netting arrangements above, each agreement between the Group and the counterparty allows for net settlement of the relevant financial assets and liabilities when both elect to settle on a net basis. In the absence of such an election, financial assets and liabilities will be settled on a gross basis. However, each party to the master netting agreement or similar agreement will have the option to settle all such amounts on a net basis in the event of default of the other party.
Note 25 Financial risk management
The Group's financial risk management is carried out under policies approved and authority delegated by the Board of Directors, including parameters for risk management across the Group. The financial risk management in relation to Retail is carried out by a central treasury department. Tesco Bank has a separate formal structure for reporting, monitoring and managing its financial risks appropriate to the nature of its business as a regulated financial institution.
The main financial risks faced by the Group, including Retail and Tesco Bank, and the management of these risks are set out below and include market risk (foreign exchange, interest rate, inflation and commodity prices), credit risk, liquidity risk, capital risk and insurance risk. Additional information on the management of the financial risks relating to Tesco Bank is also set out below.
(a) Market risk
The Group is exposed to various elements of market risk, which include foreign exchange risk, interest rate risk, commodity price risk and inflation risk.
Foreign exchange risk
The Group is exposed to foreign exchange risk principally via:
- transactional exposure that arises from the cost of future purchases of goods, where those purchases are denominated in a currency other than the functional currency of the purchasing company;
- net investment exposure that arises from changes in the value of net investments denominated in currencies other than Pounds Sterling;
- loans to and from subsidiaries in currencies other than in the entity's functional currency; and
- debt issued in a currency other than Pound Sterling.
The foreign exchange risk for each of the above is managed via:
Transactional exposure
- forward foreign currency contracts or purchased currency options, which are designated as cash flow hedges. The Group's policy is to hedge currency exposure that could significantly impact the Group income statement with a minimum (20%) and maximum (80%) hedge level of forecast uncommitted exposure within at least the next 12 months.
Net Investment exposure
- foreign currency derivatives and borrowings in matching currencies, which are formally designated as net investment hedges. The Group's policy is to hedge a part of its investments in international subsidiaries.
Intercompany loan hedging
- the use of foreign currency derivatives and borrowings in matching currencies. The Group's policy is that 100% of the foreign exchange risk is hedged. These are not formally designated as accounting hedges as gains and losses will naturally offset in the income statement.
Foreign currency debt
- cross-currency swaps which swap the non-sterling debt back into a net sterling exposure. The Group's policy is to swap foreign currency debt back to Pound Sterling, unless there are appropriate matching foreign currency assets.
Notes to the Group financial statements
Note 25 Financial risk management continued
Interest rate risk
The Group is exposed to interest rate risk principally via:
- debt issued at variable interest rates, as well as cash deposits and short-term investments, giving rise to cash flow risk; and debt issued at fixed interest rates, giving rise to fair value risk.
The interest rate risk for each of the above is managed via:
- The issuance of debt at variable and floating interest rates as well as forward rate agreements, interest rate swaps, and caps and floors, which may be used to achieve the desired mix of fixed and floating rate debt. Hedging relationships are formally designated as either fair value or cash flow hedges. The Group's policy is to target fixing a minimum of 50% of interest costs for senior unsecured debt excluding Tesco Bank. At 27 February 2021, the percentage of interest-bearing debt at fixed rates was 67% (2020: 68%). The weighted average rate of interest paid on senior unsecured debt this financial year, excluding joint ventures and associates, was 3.07% (2020: 3.30%).
The Group has RPI-linked debt where the principal is indexed to increases in the RPI. RPI debt is treated as floating rate debt. The Group also has LPI-linked debt, where the principal is indexed to RPI, with an annual maximum increase of 5% and a minimum of 0%. LPI debt is treated as fixed-rate debt. RPI-linked debt and LPI-linked debt are hedged for the effects of inflation until maturity.
During 2021 and 2020, Group net debt was managed using derivative instruments to hedge interest rate risk.
2021 2020 (restated*) Fixed Floating Total Fixed Floating Total GBPm GBPm GBPm GBPm GBPm GBPm Cash and cash equivalents - 2,510 2,510 - 4,137 4,137 Loans and advances to customers - Tesco Bank 6,402 - 6,402 4,370 4,081 8,451 Investment securities at amortised cost 502 425 927 - - - Short-term investments - 1,011 1,011 - 1,076 1,076 Financial assets at fair value through other comprehensive income 14 - 14 659 409 1,068 Joint ventures and associates loan receivables 101 21 122 106 21 127 Lease liabilities (8,402) - (8,402) (9,566) - (9,566) Bank and other borrowings (6,102) (1,166) (7,268) (6,260) (1,964) (8,224) Customer deposits - Tesco Bank (5,738) - (5,738) (3,164) (4,543) (7,707) Deposits from banks - Tesco Bank - (600) (600) (500) - (500) Derivative effect: Interest rate swaps (1,206) 1,206 - (1,092) 1,092 - Cross-currency swaps (905) 905 - 410 (410) - Index-linked swaps (299) 299 - (294) 294 - Total (15,633) 4,611 (11,022) (15,331) 4,193 (11,138)
* Refer to Note 1 for further details regarding the prior year restatement.
Commodity price risk
The Group is exposed to commodity price risk via:
- changes in commodity prices largely relating to diesel for own use.
The commodity price risk is managed via:
- forward derivative contracts which are designated as cash flow hedges. These are used to hedge future purchases of diesel for own use which are forecast to occur within a 12-month period. The Group Policy is to hedge a minimum of 50% of the forecast uncommitted exposure within the next 12 months.
Inflation risk
The Group is exposed to inflation risk in relation to its financial assets and liabilities via:
- Indexed linked debt, were the principal is indexed to increase / decrease in line with the RPI or LPI.
- Lease liabilities where rent payments are indexed to increases / decreases in inflation indexes such as RPI.
The inflation risk is managed via:
- Indexed-linked debt
- Indexed-linked swaps, which are used to hedge RPI-linked and LPI-linked debt for the effect of inflation until maturity.
- Indexed linked lease liabilities
- Indexed linked swaps, which are used to hedge inflation linked rent payments for the effect of inflation until maturity of the lease.
Hedge accounting of market risks
Derivatives are used to hedge exposure to market risks, some of which are economic hedges and others are formally designated hedging instruments with hedge accounting applied. The main sources of hedge ineffectiveness are the effect of the counterparties' and the Group's own credit risk on the fair value of derivatives.
Notes to the Group financial statements
Note 25 Financial risk management continued
Fair value hedges
The Group maintains interest rate and cross-currency swap contracts as fair value hedges of the interest rate and currency risk on fixed-rate debt issued by the Group and investment securities held by the Group.
Derivative contracts hedging fixed rate debt issued by the Group receive a fixed-rate of interest and pay a variable interest rate.
Derivative contracts held by the Group receive a floating rate of interest and pay a fixed interest rate to hedge investment securities where the Group receives a fixed rate of interest.
There is an economic relationship between the hedged item and the hedging instrument as the terms of the swap contracts match the terms of the fixed-rate borrowings, including notional amount, maturity, payment and rate set dates. The Group has established a hedge ratio of 1:1 for the hedging relationship as the underlying risk of the swap contract is identical to the hedged item.
Cash flow hedges
The Group is exposed to foreign currency risk arising from purchases of goods for resale in currencies other than the functional currency of the purchasing entity. Foreign currency forwards are utilised to hedge this risk and are formally designated as cash flow hedges.
Under the Group's hedging policy, the critical terms of the forward contracts must align with the hedged items. The foreign currency forwards are denominated in the same currency as the highly probable future sales and purchases, which are expected to occur within a maximum 24-month period, and the hedging relationship is determined to be 1:1.
The Group also uses forward contracts to hedge the price of certain commodities, these mainly relate to forward contracts to hedge future purchases of diesel for own use, which are forecast to occur within a 12-month period. These are denominated in the same currency and volume as the forecast purchases and the hedging relationship is determined to be 1:1.
The Group also uses index-linked swaps to hedge cash flows on index-linked debt and interest rate swaps to hedge interest cash flows on debt.
Net investment hedging
The Group uses Euro-denominated borrowings to hedge the exposure of a portion of its net investments in overseas operations which have a Euro functional currency, against changes in value due to changes in foreign exchange rates. The hedged risk in the net investment hedge is the risk of a weakening Euro against Pound Sterling that will result in a reduction in the carrying amount of the Group's Euro net investments.
To assess hedge effectiveness, the Group determines the economic relationship between the hedging instrument and the hedged item by comparing changes in the carrying amount of the debt that is attributable to a change in the spot rate with changes in the investment in foreign operations due to movements in the spot rate. The Group has established a hedge ratio of 1:1, as the underlying risk of the hedging instrument is identical to the hedged risk component.
The details of the hedging instruments and movements in cumulative losses on net investment hedges in other comprehensive income are set out below:
Nominal amount Movement Movement Nominal amount of the on on of the hedged hedging continuing discontinued Gains/(losses) on net investment item instrument hedges hedges hedges GBPm GBPm GBPm GBPm At 23 February 2019 1,281 1,281 (42) (976) Change in value for calculating ineffectiveness 9 9 48 (89) At 29 February 2020 1,290 1,290 6 (1,065) Change in value for calculating ineffectiveness 10 10 (10) - Recycled to Group income statement - - - 57 At 27 February 2021 1,300 1,300 (4) (1,008)
Net investment hedge ineffectiveness was GBPnil (2020: GBPnil) during the year.
During the current financial year, the Group disposed of its Asian business resulting in a recycle to the income statement from the translation reserve of GBP57m (2020: GBPnil) relating to net investment hedging.
During the current financial year, currency movements decreased the net value, after the effects of hedging, of the Group's overseas assets by GBP68m (2020: decrease by GBP68m). The Group also ensures that each subsidiary is appropriately hedged in respect of its non-functional currency assets.
Financial instruments not qualifying for hedge accounting
The Group's policy does not permit use of derivatives for trading purposes. However, some derivatives do not qualify for hedge accounting, or are specifically not designated as a hedge where gains and losses on the hedging instrument and the hedged item naturally offset in the Group income statement. These instruments include index-linked swaps, interest rate swaps, cross-currency swaps and forward foreign currency contracts.
Notes to the Group financial statements
Note 25 Financial risk management continued
IBOR reform
In the prior year, the Group early adopted the 'Interest Rate Benchmark Reform Phase 1' amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. This allowed the Group to continue hedge accounting for its benchmark interest rate exposures during the period of uncertainty from interest rate benchmark reforms.
In the current year, the Group has early adopted the 'Interest Rate Benchmark Reform Phase 2' amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 and has applied this to hedging relationships where no uncertainty remains as IBOR based benchmarks have been replaced by risk-free benchmarks for a number of hedging relationships.
Both Phase 1 and Phase 2 are relevant to the Group because it applies hedge accounting to its interest rate benchmark exposures and modifications in response to the reform have been made to some but not all of the Group's derivative and non-derivative financial instruments.
Where new hedging arrangements have been entered into during the year these have been set up utilising risk-free rates.
During the year the Group transitioned some of its exposures from IBOR based to risk free rate indices. These included interest rate swaps and floating Inter-Company lending which were transitioned to Sterling Overnight Index Average (SONIA) based indices.
None of the Group's current IBOR linked contracts include adequate and robust fall-back provisions for cessation of the referenced
benchmark interest rate.
The Group continues to monitor the market and the output from various industry groups managing the transition to new benchmark interest rates, and will look to implement fall-back language for different instruments and IBORs when appropriate.
For the Group's derivatives, the International Swaps and Derivatives Association (ISDA) fall-back clauses were made available at the end of
2019 and the Group has entered discussions with its banks and other counterparties with the aim to implement this language into its ISDAs and other relevant agreements.
The Group's transition to alternative benchmark rates is managed by cross functional teams, led by the Treasury teams in the Retail business and Tesco Bank, with the aim to complete this transition during the financial year ending 26 February 2022. There are a number of potential risks arising from the transition, however the Group does not envisage that these will materialise, as significant progress on the transition has been made with its banks and other counterparties.
The following table sets out the hedging relationships as at 27 February 2021, which include IBOR benchmarks and are yet to be transitioned to
Risk-free rate benchmarks.
Carrying value Notional Asset Liability Interest Hedging instrument GBPm GBPm GBPm rate benchmark Hedged item Hedge relationship Interest Fair value rate swaps 650 14 - EURIBOR MTN hedge Interest Fair value rate swaps 465 22 - LIBOR MTN hedge Interest Cash flow rate swaps 346 - (108) LIBOR Borrowing hedge Cross-currency interest Not in formal rate swaps 256 137 (3) LIBOR MTN hedge relationship Investment in subordinated Not in formal loans 21 21 - LIBOR - hedge relationship
Derivatives and hedging exposures
The fair value and notional amounts of derivatives analysed by hedge type are as follows:
2021 2020 Asset Liability Asset Liability Fair Fair value Notional Fair value Notional Fair value Notional value Notional GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm Fair value hedges Interest rate swaps 42 2,018 (54) 2,774 47 1,710 (51) 2,404 Cross-currency swaps - - (35) 650 232 409 - - Cash flow hedges Interest rate swaps - - (108) 346 - - (19) 50 Cross-currency swaps - - - - 265 1,477 - - Index-linked swaps 203 660 - - 186 649 - - Forward contracts 37 1,118 (59) 1,468 38 1,133 (29) 954 Derivatives not in a formal hedge relationship Interest rate swaps - 13 - 101 - 35 - 13 Cross-currency swaps 298 782 (3) 86 - - - - Index-linked swaps 877 3,209 (729) 4,982 355 3,025 (816) 5,130 Forward contracts 5 479 (19) 1,043 23 1,139 (33) 1,416 Total 1,462 8,279 (1,007) 11,450 1,146 9,577 (948) 9,967
Notes to the Group financial statements
Note 25 Financial risk management continued
The following tables set out the maturity profile and average interest rates and foreign currency exchange rates of the hedging instruments used in the Group's non-dynamic hedging strategies.
2021 2020 One to One to More than Up to five More than Up to five five Maturity profile one year years five years one year years years Fair value hedges Interest rate risk Interest rate swaps - GBP - Notional amount (GBPm) 1,384 2,156 602 953 1,910 607 - Average net interest rate (pay)/receive 0.32% 1.29% 0.59% 1.08% 0.84% 1.39% Interest rate swaps - EUR - Notional amount (GBPm) - 650 - - 645 - - Average net interest rate (pay)/receive - 0.66% - - 0.63% - Interest rate/Foreign currency risk Cross-currency swaps (GBP:EUR) - Notional amount (GBPm) - - 650 - - - - Average exchange rate - - 1.13 - - - - Average net interest rate (pay)/receive - - (0.77%) - - - Cross-currency swaps (GBP:USD) - Notional amount (GBPm) - - - - - 409 - Average exchange rate - - - - - 1.50 - Average net interest rate (pay)/receive - - - - - 3.15% Cash flow hedges Interest rate risk Index-linked swaps - Notional amount (GBPm) - 360 300 - - 649 Average net interest rate (pay)/receive - (4.23%) (4.21%) - - (4.22%) Interest rate swaps - Notional amount (GBPm) - - 346 - - 50 - Average net interest rate (pay)/receive - - (4.97%) - - (4.23%) Interest rate/Foreign currency risk Cross-currency swaps (GBP:USD) floating - Notional amount (GBPm) - - - 272 - - - Average exchange rate - - - 1.29 - - - Average net interest rate (pay)/receive - - - 0.84% - - Cross-currency swaps (GBP:EUR) fixed - Notional amount (GBPm) - - - 254 645 306 - Average exchange rate - - - 1.19 1.25 1.47 - Average net interest rate (pay)/receive - - - (0.87%) (1.46%) (0.32%)
At 27 February 2021, forward foreign currency contracts, designated as cash flow hedges, equivalent to GBP2.5bn were outstanding (2020: GBP2.1bn). These forward contracts are largely in relation to purchases of Euros (notional EUR1.0bn) (2020: notional GBP0.8bn) and US Dollars (notional $1.3bn) (2020: notional $0.9bn) with varying maturities up to August 2022.
For the above currencies the rates ranged from Euro/GBP 1.08 to 1.156 and US$/GBP from 1.222 to 1.416.
Forward commodity contracts hedging diesel purchases for own use as at 27 February 2021 had a GBP notional of GBP54m (2020: GBP69m) at a rate of GBP277 to GBP457 per tonne.
The notional and fair values of these contracts is shown on page 82.
The following table sets out the details of the hedged exposures covered by the Group's fair value hedges.
Accumulated amounts of fair value adjustments on Carrying amount hedged item Changes in fair value for calculating Residual hedge hedge Assets Liabilities Assets Liabilities ineffectiveness adjustments(a) At 27 February 2021 GBPm GBPm GBPm GBPm GBPm GBPm Fair value hedges Interest rate risk Fixed-rate loans (b) 3,653 - 7 - (3) (3) Fixed-rate savings (c) - (1,866) - - - -
Fixed-rate investment securities (b) 500 - 10 - 8 - Fixed-rate bonds (d) - (2,926) - (95) (59) (97)
(a) Accumulated amount of fair value hedge adjustments remaining in the Group balance sheet for
any hedged items that have ceased to be adjusted for hedging gains and losses. (b) Classified as Loans and advances to customers and banks. (c) Classified as Customer deposits and Deposits from Banks. (d) Classified as Borrowings.
Notes to the Group financial statements
Note 25 Financial risk management continued
Accumulated amounts of fair value adjustments on Carrying amount hedged item Changes in fair value for Residual calculating hedge hedge adjustments Assets Liabilities Assets Liabilities ineffectiveness (a) At 29 February 2020 GBPm GBPm GBPm GBPm GBPm GBPm Fair value hedges Interest rate risk Fixed-rate loans and mortgages (b) 4,416 - 10 - 12 6 Fixed-rate savings (c) - (3,003) - (1) (1) (1) Fixed-rate investment securities (b) 650 - 2 - 7 - Fixed-rate bonds (d) - (2,348) - (216) 140 (34) (a)-(d) Refer to previous table for footnotes.
The following tables set out information regarding the change in value of the hedged item used in calculating hedge ineffectiveness as well as the impacts on the cash flow hedge reserve and cost of hedging reserve.
Cumulative impact on hedging reserve and cost of hedging reserve* Change in value of Change in hedging value of instrument hedged item for for calculating calculating hedge hedge Continuing Discontinued ineffectiveness ineffectiveness hedges hedges At 27 February 2021 Hedging instrument GBPm GBPm GBPm GBPm Interest rate risk Index-linked Index-linked bonds bonds 1 (1) 71 - Interest rate Borrowings swaps 30 (30) 18 - Foreign currency risk Trade payables Forward contracts (44) 44 (24) - Interest rate/Foreign currency risk Cross -- currency MTNs swaps 6 (6) - 43
* Excludes deferred tax.
Cumulative impact on hedging reserve and cost of hedging reserve* Change in value of Change in hedging value of instrument hedged item for for calculating calculating hedge hedge Continuing Discontinued ineffectiveness ineffectiveness hedges hedges At 29 February 2020 Hedging instrument GBPm GBPm GBPm GBPm Interest rate risk Index-linked Index-linked bonds bonds 22 (22) 69 - Interest rate Borrowings swaps (2) 2 (4) - Foreign currency risk Trade payables Forward contracts 55 (55) 8 - Interest rate/Foreign currency risk Cross -- currency MTNs swaps 28 (28) 137 (44)
* Excludes deferred tax.
The following table sets out information regarding the effectiveness of hedging relationships designated by the Group, as well as the impacts on profit or loss and other comprehensive income:
2021 2020 Line item in Hedge ineffectiveness Hedge ineffectiveness Group income recognised recognised statement that in profit in profit includes hedge or loss or loss ineffectiveness GBPm GBPm Cash flow hedges Finance income/costs - - Net investment hedges Finance income/costs - - Fair value hedges - interest rate risk - Borrowings Finance income/costs (18) (6) - Derivatives Finance income/costs - -
Notes to the Group financial statements
Note 25 Financial risk management continued
The following table presents a reconciliation by risk category of the Cash flow hedge and Cost of hedging reserves and an analysis of other comprehensive income in relation to hedge accounting:
2021 2020 Cost of Cost of Hedging hedging Hedging hedging reserve reserve reserve reserve GBPm GBPm Line item GBPm GBPm Line item Opening balance 154 (15) 118 (5) Interest rate risk Index-linked swaps - Net fair value gains/(losses) 16 - 1 - - Amount reclassified Finance Finance to Group income statement (15) - income/costs (2) - income/costs Interest rate swaps - Net fair value gains/(losses) 30 - (2) - - Amount reclassified Finance Finance to Group income statement (6) - income/costs (1) - income/costs Interest rate/Foreign currency risk Cross-currency swaps - Net fair value gains/(losses) (4) 17 70 (12) - Amount reclassified Finance Finance to Group income statement (65) - income/costs (4) - income/costs Foreign currency risk Forward contracts - Net fair value gains/(losses) (3) - 49 - - Amount reclassified to Inventories (28) - Inventories (64) - Inventories Tax 11 (2) (11) 2 Closing balance 90 - 154 (15)
Sensitivity analysis
The impact on the financial statements of the Group, including Retail and Tesco Bank, from foreign currency, inflation and interest rate volatility is discussed below.
The analysis excludes the impact of movements in market variables on the carrying value of pension and other post-employment benefit obligations and on the retranslation of overseas net assets. However, it does include the foreign exchange sensitivity resulting from local entity non-functional currency financial instruments.
The sensitivity analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives portfolio, and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 27 February 2021. It should be noted that the sensitivity analysis reflects the impact on income and equity due to financial instruments held at the balance sheet date. It does not reflect any change in sales or costs that may result from changing interest or exchange rates.
The following assumptions were made in calculating the sensitivity analysis:
- the sensitivity of interest payable to movements in interest rates is calculated on net floating rate exposures on debt, deposits and derivative instruments with no sensitivity assumed for RPI-linked borrowings, which have been swapped to fixed rates;
- changes in the carrying value of derivative financial instruments designated as fair value hedges from movements in interest rates or foreign exchange rates have an immaterial effect on the Group income statement
and equity due to compensating adjustments in the carrying value of debt;
- changes in the carrying value of financial instruments designated as net investment hedges from movements in foreign exchange rates are recorded directly in the Group statement of comprehensive income/(loss);
- all other changes in the carrying value of derivative financial instruments designated as hedging instruments are fully effective with no impact on the Group income statement; and
- the floating leg of any swap or any floating rate debt is treated as not having any interest rate already set, therefore a change in interest rates affects a full 12-month period for the interest payable portion of the sensitivity calculations.
Using the above assumptions, the following table shows the quantitative effect on the Group income statement and Group statement of changes in equity that would result, at the balance sheet date, from changes in interest rates, inflation rates and currency exchange rates that are reasonably possible for major currencies where there have recently been significant movements:
2021 2020 Income Equity Income Equity gain/(loss) gain/(loss) gain/(loss) gain/(loss) GBPm GBPm GBPm GBPm 1% increase in interest rates (2020: 1%) (31) 31 39 (42) 10% appreciation of the Euro (2020: 10%) (5) (96) 1 (117) 10% appreciation of the US Dollar (2020: 10%) 3 97 5 78 25 basis points parallel upward shift in the forward inflation curve (2020: 25 basis points) 116 - 86 -
Notes to the Group financial statements
Note 25 Financial risk management continued
A decrease in interest rates, depreciation of foreign currencies and downward shift in the forward inflation curve would have the opposite effect to the impact in the table above.
The impact on the Group income statement resulting from changes in foreign exchange rates against GBP in relation to financial instruments (excluding those arising on consolidation) are minimal as Group policy dictates that all material income statement foreign exchange exposures are hedged.
During the current and prior financial year, the Group entered into a number of derivative index-linked contracts with external counterparties, to economically hedge a proportion of the Group's exposure to index-linked lease liabilities with its joint ventures. These are specifically not designated as accounting hedges but are economic hedges. However, the gains and losses on the hedging instrument and hedged item do not naturally offset in the Group income statement. This mismatch arises due to different accounting outcomes of IFRS 9 and IFRS 16 which results in a timing difference.
The impact on the Group statement of comprehensive income/(loss) from changing exchange rates results from the revaluation of financial liabilities used as net investment hedges. The impact on the Group statement of comprehensive income/(loss) will largely be offset by the revaluation in equity of the hedged assets in the Group statement of changes in equity.
(b) Credit risk
Credit risk represents the risk that a counterparty will not meet its obligations leading to a financial loss for the Group. Credit risk arises from Cash and cash equivalents, Short-term investments, Trade receivables, Other receivables, Joint ventures and associates loan receivables, Loans and advances to customers - Tesco Bank, Loans and advances to banks - Tesco Bank, Investment securities at amortised cost, Financial assets at fair value through other comprehensive income, and Derivative financial instruments.
For financial assets other than Trade receivables, Other receivables, Joint ventures and associates loan receivables, and Loans and advances to customers - Tesco Bank, the Group holds positions with an approved list of investment-grade rated counterparties and monitors the exposure, credit rating, outlook and credit default swap levels of these counterparties on a regular basis. Counterparty credit limits are reviewed on an annual basis and may be updated throughout the financial year. The limits are set to minimise the concentration of risk and are set taking into account the type and value of the specific financial asset.
For Trade receivables, Other receivables, Joint ventures and associates loan receivables, and Loans and advances to customers - Tesco Bank, the Group's credit risk is managed with various mitigating controls including credit checks, credit insurance and master netting agreements. Due to the nature of the Retail and Tesco Bank businesses, there is little concentration of risk due to the large number of customers which are spread across wide geographical areas.
Maximum exposure to credit risk
The maximum exposure to credit risk at the end of the reporting period reflects the carrying amount of each class of financial assets, including loan commitments which are not recognised on the balance sheet. Joint ventures and associates loan receivables in the table below are gross of deferred profits historically arising from the sale of property assets to joint ventures (see Note 31). The Group's maximum exposure to credit risk is GBP26.0bn (2020: GBP28.9bn).
The net counterparty exposure under derivative contracts is GBP1.2bn (2020: GBP1.0bn).
The Group's maximum gross exposure to credit risk is analysed below by class of financial instrument, including for financial instruments that are not subject to ECL i.e. derivative financial instruments and cash balances with central banks:
2021 2020(a) GBPm GBPm Cash and cash equivalents (b) 2,510 4,137 Short-term investments 1,011 1,076 Trade receivables 424 495 Other receivables 430 439 Joint venture and associate loan receivables 160 181 Loans and advances to customers - Tesco Bank 6,402 8,451 Investment securities at amortised cost 927 - Financial assets at fair value through other comprehensive income 14 1,068 Derivative financial instruments: Interest rate swaps 42 47 Cross-currency swaps 298 497 Index-linked swaps 1,080 541 Forward contracts 42 61 Off balance sheet: Loan commitments 12,668 11,872 Maximum exposure to credit risk 26,008 28,865 (a) Refer to Note 1 for further details regarding the prior year restatement.
(b) Cash balances with central banks of GBP1.6bn (2020: GBP2.6bn) are included within Cash and cash equivalents.
Notes to the Group financial statements
Note 25 Financial risk management continued
Counterparty credit rating
The table below provides detail of financial assets by long term credit rating of investment-grade rated counterparties:
2021 2020 Rating AAA AA A BBB Total AAA AA A BBB Total Money market funds 955 - 56 - 1,011 1,076 - - - 1,076 Investment securities at amortised cost 560 65 302 - 927 - - - - - Investment securities at fair value through other comprehensive income - 5 - - 5 525 248 274 14 1,061 Derivatives financial assets Interest rate swaps - 9 27 6 42 - 8 39 - 47 Cross currency swaps - - 211 87 298 - - 287 210 497 Index Linked swaps - - 613 467 1,080 - - 95 446 541 Forward contracts - 1 27 14 42 - 9 35 17 61
The low credit risk exemption has been applied to cash and cash equivalents, short-term investments, financial assets at fair value through OCI, financial assets at amortised cost and investment securities as these are held with counterparties with investment-grade ratings (BBB or above) or are short term in nature. The expected credit loss is immaterial.
Expected credit losses
For trade receivables, contract assets and lease receivables the Group applies the simplified approach with lifetime ECLs recognised from initial recognition of the receivables. For loans and advances to customers, short-term investments, investment securities at amortised cost, debt instruments at fair value through other comprehensive income and loan receivables from joint venture and associates, the three-stage model for impairment has been applied. The expected lifetime of a financial asset is generally the contractual term.
The Group's financial assets are written off when the balance is known not to be recoverable or the Group is time barred from recovering a balance under local legislation.
The expected credit losses for Retail are immaterial. For details on the expected credit losses relating to Tesco Bank see below.
Gross loans to related parties of GBP160m (2020: GBP181m) are presented net of loss allowances of GBPnil (2020: GBP2m) and deferred profits of GBP38m (2020: GBP54m) on the Group balance sheet. The ECL is determined by multiplying together the probability of default (PD), exposure at default (EAD) and the loss given default (LGD) for the relevant time period and for each specific loan and by discounting back to the balance sheet date.
(c) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities.
The Group finances its liquidity position and its operations by a combination of retained profits, disposals of assets, debt capital market issuance, commercial paper, bank borrowings and leases. The policy is to maintain a prudent level of cash together with sufficient committed bank facilities to meet liquidity needs as they arise, to maintain a smooth debt profile and maturing senior unsecured debt will not exceed GBP1.5bn in any 12-month period.
The Group retains access to capital markets so that maturing debt may be refinanced as it falls due and the Group is investment grade rating with all three major credit rating agencies.
2021 2020 Short Long Short Long term term term term rating rating Outlook rating rating Outlook Rating agency Fitch F3 BBB- Stable F3 BBB- Stable Moody's P-3 Baa3 Stable P-3 Baa3 Stable Standard & Poor's A-3 BBB- Stable A-3 BBB- Stable
The Group has a GBP15.0bn Euro Medium Term Note programme, of which GBP4bn was in issue at 27 February 2021 (2020: GBP4.0bn), plus GBP0.3bn equivalent of USD-denominated notes issued under 144A documentation (2020: GBP0.4bn).
Liquidity risk is continuously monitored by short-term and long-term cash flow forecasts.
During the year, the Group accessed the capital markets twice issuing GBP450m (maturing in 2030) and EUR750m (maturing in 2029). The EUR750m issuance was the Group's first sustainability linked bond. The bond includes a coupon step up of 25 bps for the final three coupon payments, if science-based carbon reduction targets of 60% are not achieved compared to a 2015/16 baseline.
Borrowing facilities
The Group has the following undrawn committed facilities available at 27 February 2021, in respect of which all conditions precedent had been met as at that date:
2021 2020 GBPm GBPm Expiring in less than one year 38 38 Expiring between one and two years - 3,000 Expiring in more than two years 2,500 - 2,538 3,038
During the year, a new three-year multicurrency GBP2.5bn revolving facility was established, replacing the existing GBP3bn committed facilities. The new facility is linked to three ESG targets and includes the use of risk-free rates rather than LIBOR.
The undrawn committed facilities include GBPnil (2020: GBP0.4bn) of bilateral facilities and a GBP2.5bn (2020: GBP2.6bn) syndicated revolving credit facility. All facilities incur commitment fees at market rates and would provide funding at floating rates. There were no withdraws from the facilities during the year.
Notes to the Group financial statements
Note 25 Financial risk management continued
For liquidity risk relating to Tesco Bank, refer to the separate section on Tesco Bank financial risk factors on page 89.
The following is an analysis of the undiscounted contractual cash flows payable under financial liabilities and derivative liabilities taking into account contractual terms that provide the counterparty a choice of when (the earliest date) an amount is repaid by the Group. The potential cash outflow is considered acceptable as it is offset by financial assets.
The undiscounted cash flows will differ from both the carrying values and fair values. Floating-rate interest and inflation is estimated using the prevailing rate at the balance sheet date. Cash flows in foreign currencies are translated using spot rates at the balance sheet date.
Due between Due between Due between Due between Due within 1 and 2 and 3 and 4 and Due beyond 1 year 2 years 3 years 4 years 5 years 5 years At 27 February 2021 GBPm GBPm GBPm GBPm GBPm GBPm Non-derivative financial liabilities Bank and other borrowings (1,002) (53) (779) (724) (888) (3,844) Interest payments on borrowings (199) (172) (170) (151) (134) (905) Customer deposits - Tesco Bank (4,924) (488) (253) (114) (24) - Deposits from banks - Tesco Bank (500) - (100) - - - Lease liabilities (969) (939) (912) (867) (841) (7,999) Trade payables (5,131) - - - - - Other payables (1,543) (23) (3) (1) - (83) Derivative financial liabilities Net settled derivative contracts - receipts 69 51 32 26 4 19 Net settled derivative contracts - payments (88) (533) (217) (186) (23) (78) Gross settled derivative contracts - receipts 2 2 2 1 1 2 Gross settled derivative contracts - payments (7) (8) (10) (11) (12) (61) Total on balance sheet (14,292) (2,163) (2,410) (2,027) (1,917) (12,949) Off balance sheet Contractual lending commitments (12,668) - - - - - Total (26,960) (2,163) (2,410) (2,027) (1,917) (12,949) Due between Due between Due between Due between Due Due within 1 and 2 and 3 and 4 and beyond 1 year 2 years 3 years 4 years 5 years 5 years At 29 February 2020 (restated)* GBPm GBPm GBPm GBPm GBPm GBPm Non-derivative financial liabilities Bank and other borrowings (2,120) (467) (53) (795) (956) (3,776) Interest payments on borrowings (227) (208) (181) (179) (159) (1,237) Customer deposits - Tesco Bank (6,426) (797) (233) (187) (115) - Deposits from banks - Tesco Bank (3) (1) (501) - - - Lease liabilities (1,081) (1,018) (996) (993) (951) (9,584) Trade payables (5,409) - - - - - Other payables (1,623) (22) (18) (2) (1) (127) Derivative financial liabilities Net settled derivative contracts - receipts 10 11 467 116 - 25 Net settled derivative contracts - payments (717) (42) (470) (148) (160) (18) Gross settled derivative contracts - receipts 2,534 - - - - - Gross settled derivative contracts - payments (2,585) - - - - - Total on balance sheet (17,647) (2,544) (1,985) (2,188) (2,342) (14,717) Off balance sheet Contractual lending commitments (11,872) - - - - - Total (29,519) (2,544) (1,985) (2,188) (2,342) (14,717)
* Refer to Note 1 for further details regarding the prior year restatement.
The Group is not subject to covenants in relation to its facilities and borrowings. There is an element of seasonality in the Group's operations, however the overall impact on liquidity is not considered significant.
The Group cash flow statement includes net (investment in) / proceeds from sale of financial assets at fair value through other comprehensive income and amortised cost of GBP116m inflow (2020: GBP6m outflow) within cash flows generated from/(used in) investing activities. The gross cash flows are GBP201m inflow (2020: GBP774m inflow) and GBP85m outflow (2020: GBP780m outflow).
The Group cash flow statement includes net cash flows from derivative financial instruments of GBP580m outflow (2020: GBP17m outflow) within cash flows generated from/(used in) financing activities. The gross cash flows are GBP2,276m outflow (2020: GBP346m outflow) and GBP1,696m inflow (2020: GBP329m inflow).
Notes to the Group financial statements
Note 25 Financial risk management continued
(d) Capital risk
The Group's objectives when managing capital (defined as net debt plus equity) are to safeguard the Group's ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders, while protecting and strengthening the Group balance sheet through the appropriate balance of debt and equity funding. The Group manages its capital structure and makes adjustments to it, in light of changes to economic conditions and the strategic objectives of the Group.
To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, buy back shares and cancel them, or issue new shares.
The Group raises finance in the public debt markets and borrows centrally and locally from financial institutions, using a variety of capital market instruments and borrowing facilities to meet the requirements of each local business.
In line with the Group's objectives, during the current financial year, the Group issued a GBP450m bond maturing in 2030 and undertook a liability management exercise by combining an issuance of EUR750m bond maturing in 2029 with a debt buyback, the latter resulting in notionals of GBP0.6bn
bought back across eight bonds.
Refer to Note 32 for the value of the Group's net debt (GBP12.0bn; 2020: GBP12.3bn), and the Group statement of changes in equity for the value of the Group's equity (GBP12.3bn; 2020: GBP13.4bn).
(e) Insurance risk
The Group is exposed to the risk of being inadequately protected from liabilities arising from unforeseen events. The Group purchased assets, earnings and combined liability protection from the open insurance market for higher value losses only.
The risk not transferred to the insurance market is retained within the Group with some cover being provided by the Group's captive insurance company, ELH Insurance Limited in Guernsey, which covers assets, earnings and combined liability.
Tesco Bank
Information on the management of the financial risks relating to Tesco Bank, which is additional to the information provided for the Group overall, is set out below.
Interest rate risk
Interest rate risk arises mainly where assets and liabilities in Tesco Bank's banking activities have different repricing dates and from unexpected changes to the yield curve. Tesco Bank is exposed to interest rate risk through dealings with retail customers as well as through lending to and borrowing from the wholesale market. Tesco Bank has established limits for risk appetite and stress tests are performed using sensitivity to fluctuations in underlying interest rates in order to monitor this risk. Tesco Bank also use the Capital at Risk (CaR) approach which assesses the sensitivity (value change) of a reduction in the Bank's capital to movements in interest rates.
The scenarios considered include both parallel and non-parallel movements of the yield curve and have been designed to assess impacts across a suitable range of severe but plausible movements in interest rates. Interest rate risk is primarily managed using interest rate swaps as the main hedging instrument.
Liquidity risk
Liquidity risk is the risk that Tesco Bank has insufficient liquidity resources to meet its obligations as they fall due. Funding risk is the risk that Tesco Bank does not have sufficiently stable and diverse sources of funding.
Tesco Bank operates within a Liquidity Risk Management Policy Framework (LRMP) to ensure that sufficient funds are available at all times to meet demands from depositors, to fund agreed advances, to meet other commitments as and when they fall due, and to ensure risk appetite is met.
Liquidity and funding risks are assessed through the Individual Liquidity Adequacy Assessment Process (ILAAP) on at least an annual basis. Formal limits are set within the LRMP to maintain liquidity risk exposures within the Liquidity Risk Appetite set by Tesco Bank's Board of Directors and key liquidity measures are monitored on a regular basis. Tesco Bank maintains a conservative liquidity and funding profile to confirm that it is able to meet its financial obligations under normal, and stressed, market conditions.
Credit risk
Credit risk is the risk that a retail customer or counterparty to a wholesale transaction will fail to meet its obligations in accordance with contractually agreed terms and Tesco Bank will incur losses as a result. Credit risk principally arises from the Bank's retail lending activities but also from the placement of surplus funds with other banks and money market funds, investments in transferable securities and interest rate and foreign exchange derivatives. In addition, credit risk arises from contractual arrangements with third parties where payments and commissions are due to the Bank for short periods of time. To minimise the potential exposure to bad debts that are outside risk appetite, processes, systems and limits have been established that cover the end-to-end retail credit risk customer life cycle. These include credit scoring, affordability, credit policies and guides, and monitoring and reporting. The Bank is also exposed to wholesale credit risk primarily through its treasury activities. Controls and risk mitigants include daily monitoring of exposures, investing in counterparties with investment grade ratings, restricting the amount that can be invested with one counterparty and credit-rating mitigation techniques. Assessment of the expected credit loss (ECL) on loans and advances to customers has taken into account a range of macroeconomic scenarios.
Notes to the Group financial statements
Note 25 Financial risk management continued
Maximum exposure to credit risk
The table below presents Tesco Bank's maximum exposure to credit risk i.e. total gross exposure, by stages and by class of financial instruments. For financial assets, the balances are based on gross carrying amounts. For loan commitments, the amounts represent the amounts for which Tesco Bank is contractually committed:
Stage 1 Stage 2 Stage 3 Total <30 days >30 days Not past past past due due due Total 27 February 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm Loans and advances to customers 5,749 981 25 25 1,031 242 7,022 Investment securities at FVOCI(a) 5 - - - - - 5 Investment securities at amortised cost 928 - - - - - 928 Loan commitments - Loans and advances to customers (b) 12,379 283 2 - 285 4 12,668 Total gross exposure 19,061 1,264 27 25 1,316 246 20,623 Loss allowance Loans and advances to customers (b) 131 314 11 16 341 153 625 Investment securities at FVOCI - - - - - - - Investment securities at amortised cost 1 - - - - - 1 Total loss allowance 132 314 11 16 341 153 626 Net Exposure Loans and advances to customers 5,618 667 14 9 690 89 6,397 Investment securities at FVOCI 5 - - - - - 5 Investment securities at amortised cost 927 - - - - - 927 Total net exposure 6,550 667 14 9 690 89 7,329 Coverage Loans and advances to customers 2% 32% 44% 64% 33% 63% 9%
(a) On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.
(b) The loss allowance in respect of loan commitments is included within the total loss allowance for loans and advance to customers as above to the extent that it is below the gross carrying amount of loans and advances to customers. Where the loss allowance exceeds the gross carrying amount, any excess is included within the provisions.
Stage 1 Stage 2 Stage 3 Total <30 days >30 days Not past past past due due due Total 29 February 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm Loans and advances to customers 7,688 869 52 32 953 289 8,930 Investment securities at FVOCI(a) 1,061 - - - - - 1,061 Investment securities at amortised cost - - - - - - - Loan commitments - Loans and advances to customers (b) 11,755 116 - - 116 1 11,872
Total gross exposure 20,504 985 52 32 1,069 290 21,863 Loss allowance Loans and advances to customers (b) 83 178 21 20 219 186 488 Investment securities at FVOCI - - - - - - - Investment securities at amortised cost - - - - - - - Total loss allowance 83 178 21 20 219 186 488 Net Exposure Loans and advances to customers 7,605 691 31 12 734 103 8,442 Investment securities at FVOCI 1,061 - - - - - 1,061 Investment securities at amortised cost - - - - - - - Total net exposure 8,666 691 31 12 734 103 9,503 Coverage Loans and advances to customers 1% 20% 40% 63% 23% 64% 5%
(a)-(b) Refer to previous table for footnotes.
Expected credit losses (ECL)
The ECL is determined by multiplying together the probability of default (PD), exposure at default (EAD) and loss given default (LGD) for the relevant time period and for each asset category and by discounting back to the balance sheet date. The ECL calculation and the measurement of significant deterioration in credit risk both incorporate forward-looking information using a range of macroeconomic scenarios, with key variables being the Bank of England base rate, unemployment rate, house price index and gross domestic product. The key economic variables are based on historical patterns observed over a range of economic cycles.
Notes to the Group financial statements
Note 25 Financial risk management continued
The tables below present the reconciliations of ECL allowances on loans and advances to customers.
2021 Stage 1 Stage 2 Stage 3 Total 27 February 2021 GBPm GBPm GBPm GBPm Gross exposure 5,749 1,031 242 7,022 Loan commitments 12,379 285 4 12,668 Total exposure 18,128 1,316 246 19,690 Allowance for expected credit losses At 29 February 2020 (83) (219) (186) (488) Transfers: Transfers from stage 1 to stage 2 20 (20) - - Transfers from stage 2 to stage 1 (9) 9 - - Transfers to stage 3 2 42 (44) - Transfers from stage 3 (2) (2) 4 - Movements recognised in the Group income statement: Net remeasurement following transfer of stage 6 (36) (72) (102) New financial assets originated (25) (5) (2) (32) Financial assets derecognised during the current financial year 8 9 3 20 Changes in risk parameters and other movements (56) (134) (83) (273) Other movements: Write-offs and asset disposals - 3 227 230 Transfers to provisions for liabilities and charges 8 12 - 20 Reclassification of mortgage book balances to fair value through profit or loss - - - - At 27 February 2021 (131) (341) (153) (625) Reconciliation to Group balance sheet Gross exposure 5,749 1,031 242 7,022 Allowance for expected credit losses (131) (341) (153) (625) 5,618 690 89 6,397 Fair value adjustment 5 Carrying value at 27 February 2021 6,402 2020 Stage 1 Stage 2 Stage 3 Total 29 February 2020 GBPm GBPm GBPm GBPm Gross exposure 7,688 953 289 8,930 Loan commitments 11,755 116 1 11,872 Total exposure 19,443 1,069 290 20,802 Allowance for expected credit losses At 23 February 2019 (84) (229) (172) (485) Transfers: Transfers from stage 1 to stage 2 11 (11) - - Transfers from stage 2 to stage 1 (64) 64 - - Transfers to stage 3 3 50 (53) - Transfers from stage 3 (2) (2) 4 - Movements recognised in the Group income statement: Net remeasurement following transfer of stage 38 (23) (93) (78) New financial assets originated (27) (21) (10) (58) Financial assets derecognised during the current financial year 9 12 3 24 Changes in risk parameters and other movements 32 (63) (60) (91) Other movements: Write-offs and asset disposals - 3 195 198 Transfers to provisions for liabilities and charges - - - - Reclassification of mortgage book balances to fair value through profit or loss 1 1 - 2 At 29 February 2020 (83) (219) (186) (488) Reconciliation to Group balance sheet Gross exposure 7,688 953 289 8,930 Allowance for expected credit losses (83) (219) (186) (488) 7,605 734 103 8,442 Fair value adjustment 9 Carrying value at 29 February 2020 8,451
The Bank defines four classifications of credit quality for all credit exposures: high, satisfactory, low and below standard. Credit exposures are segmented according to the probability of default (PD), with credit impaired reflecting a PD of 100%.
Notes to the Group financial statements
Note 25 Financial risk management continued
Stage Stage 12-month PD 1 2 Stage 3 Total At 27 February 2021 % GBPm GBPm GBPm GBPm Loans and advances to customers: High quality <=3.02 5,314 445 - 5,759 Satisfactory quality >3.03 - 11.10 392 389 - 781 Low quality and below standard >=11.11 43 197 - 240 Credit impaired 100 - - 242 242 5,749 1,031 242 7,022 12-month PD Stage 1 Stage 2 Stage 3 Total At 29 February 2020 % GBPm GBPm GBPm GBPm Loans and advances to customers: High quality <=3.02 6,609 37 - 6,646 Satisfactory quality >3.03 - 11.10 1,037 485 - 1,522 Low quality and below standard >=11.11 42 431 - 473 Credit impaired 100 - - 289 289 7,688 953 289 8,930
Default
An account is deemed to have defaulted when the Tesco Bank considers that a customer is in significant financial difficulty and that the customer meets certain quantitative and qualitative criteria regarding their ability to make contractual payments when due. This includes instances where:
- the customer makes a declaration of significant financial difficulty;
- the customer or third-party agency communicates that it is probable that the customer will enter bankruptcy or another form of financial restructure such as insolvency or repossession;
- the account has been transferred to recoveries and the relationship is terminated;
- an account's contractual payments are more than 90 days past due; or
- where the customer is deceased.
A loan deemed uncollectable is written off against the related provision after all of the necessary procedures have been completed and the amount of the loss has been determined. Tesco Bank may write off loans that are still subject to enforcement activity. The outstanding contractual amount of such assets written off were GBP154m (2020: GBP140m).
Significant increase in credit risk
At each reporting date, the change in credit risk of the financial asset is observed using a set of quantitative and qualitative criteria, together with a backstop based on arrears status. For each financial asset, Tesco Bank compares the lifetime PD at the reporting date with the lifetime PD that was expected at the reporting date at initial recognition (PD threshold). Tesco Bank has established PD thresholds for each type of product which vary depending on initial term and term remaining. A number of qualitative criteria are in place such as: forbearance offered to customers in financial difficulty; risk-based pricing post-origination; credit indebtedness; credit limit decrease; and pre-delinquency information. As a backstop, Tesco Bank considers that if an account's contractual payment are more than 30 days past due then a significant increase in credit risk has taken place. Tesco Bank has used the low credit risk exemption in respect of its portfolio of investment securities in both the current and prior year.
Tesco Bank has commissioned four scenarios from its third -- party provider, all of which were based on an economic outlook that sought to take account of the potential ramifications of the current COVID -- 19 pandemic. These scenarios include a Base scenario, an Upside scenario and two different Downside scenarios. As the economic outlook remains uncertain, the scenarios are based on the success of the COVID -- 19 vaccine roll out against emerging strains of the virus and, as the restrictions are lifted, the speed at which consumer and business confidence will support the recovery in GDP and the labour market. The Base scenario anticipates a delayed economic recovery, with consumer confidence remaining weak in the near term and unemployment peaking in Q3 2021. The Upside scenario involves a sharper economic recovery while Downside 1 scenario assumes a longer delay until the economy recovers. Downside 2 is a prolonged and sustained recession with a slow economic recovery thereafter. These scenarios are also reviewed to ensure an unbiased estimate of ECL by ensuring the credit loss distribution under a larger number of scenarios is adequately captured using these four scenarios and their respective weightings. The Base, Upside, Downside 1 and Downside 2 scenarios have been assigned weighting of 40%, 30%, 25% and 5% respectively.
The economic scenarios used include the following ranges of key indicators:
Base Downside Downside Upside 1 2 COVID-19 As at 27 February 2021 (5 year 40% average) 30% 25% 5% n/a Bank of England base rate (a) 0.1% 0.2% 0.1 % 0.1% n/a Gross domestic product (b) 2.6% 3.5% 2.2 % 1.8% n/a Unemployment rate 5.5% 4.7% 6.7 % 8.6% n/a Unemployment rate peak in year 5.8% 4.9% 7.4 % 9.3% n/a Base Downside Downside Upside 1 2 Covid-19 As at 29 February 2020 (5 year 40% average) 20% 30% 5% 5% Bank of England base rate (a) 0.6% 0.2% 1.4 % 2.3% 2.3% Gross domestic product (b) 1.6% 2.0% 1.0 % 0.7% 0.7% Unemployment rate 3.9% 3.9% 5.3 % 6.1% 6.1% Unemployment rate peak in year 3.9% 3.9% 5.5 % 6.3% 6.3% (a) Simple average (b) Annual growth rates
Notes to the Group financial statements
Note 25 Financial risk management continued
Key assumptions and sensitivity
The key assumptions to which the Tesco Bank ECL is most sensitive are macroeconomic factors, probability of default (PD), loss given default (LGD), PD threshold (staging), and expected lifetime (revolving credit facilities). The table below sets out the changes in the ECL allowance that would arise from reasonably possible changes in these assumptions from those used in Tesco Bank's calculations as at 27 February 2021.
Impact on the loss allowance 2021 2020 Key assumption Reasonably possible change GBPm GBPm Closing ECL allowance 625 488 Macroeconomic factors (100% weighted) Upside scenario (66) (41) Base scenario (1) (28) Downside scenario 1 57 40 Downside scenario 2 117 103 Probability of default Increase of 2.5% 8 11 Decrease of 2.5% (8) (11) Loss given default Increase of 2.5% 10 12 Decrease of 2.5% (10) (12) Probability of threshold (staging) Increase of 20% (7) (17) Decrease of 20% 11 21 Expected lifetime (revolving credit facility) Increase of 1 year 9 2 Decrease of 1 year (9) (2)
COVID -- 19 has had a significant impact on the global economy and there remains a large degree of uncertainty around the scale and stress of the peak of the economic downturn and the speed and shape of any subsequent recovery. The extension of government support measures such as furlough has been unprecedented and this, coupled with the granting of payment holidays by Tesco Bank, have broken traditional modelled relationships between unemployment and default. Although projected levels of unemployment remain high, Tesco Bank is yet to see significant defaults emerge in its lending portfolio and, as such, COVID -- 19 specific adjustments to the modelled ECL provision to capture the estimated impact of the stress within the ECL provision have been recognised for an overall post-model adjustment of GBP214m which includes three management overlays. A first GBP129m adjustment is in respect of the beneficial modelling impact of lower consumer spending through the pandemic. An increase or decrease of 10% on the adjustment for lower drawn balances would not result in a material increase or decrease of this management overlay. A second GBP64m adjustment is to recognise the expected emergence of defaults once support measures such as furlough and the various temporary customer support measures Tesco Bank has put in place are removed and a third GBP21m adjustment is to recognise an increase in credit risk in respect of customers who sought an extension to their initial payment holiday.
Forbearance
Tesco Bank could be exposed to unacceptable levels of bad debt and also suffer reputational damage if it did not provide adequate support to customers who are experiencing financial difficulties. Forbearance is relief granted by a lender to assist customers in financial difficulty, through arrangements which temporarily allow the customer to pay an amount other than the contractual amounts due. These temporary arrangements may be initiated by the customer or Tesco Bank where financial distress would prevent repayment within the original terms and conditions of the contract. The main aim of forbearance is to support customers in returning to a position where they are able to meet their contractual obligations.
Tesco Bank has adopted the definition of forbearance in the European Banking Authority's (EBA) final draft Implementing Technical Standards (ITS) of July 2014 and reports all accounts meeting this definition, providing for them appropriately.
Tesco Bank has well defined forbearance policies and processes. A number of forbearance options are made available to customers. These routinely, but not exclusively, include the following:
- arrangements to repay arrears over a period of time, by making payments above the contractual amount, that ensure the loan is repaid within the original repayment term;
- short-term concessions, where the borrower is allowed to make reduced repayments (or in exceptional circumstances, no repayments) on a temporary basis to assist with short-term financial hardship; and
- for secured products, it may also be acceptable to allow the customer to clear the arrears over an extended period of time, provided the payments remain affordable.
Forbearance programmes Proportion of Gross loans and as a proportion forbearance programmes advances subject of total loans covered by allowance to forbearance and advances for expected programmes by category credit losses 2021 2020 2021 2020 2021 2020 GBPm GBPm % % % % Credit cards - UK 119 108 4 3 50 50 Credit cards - Commercial - - 5 5 96 94 Loans 48 49 1 1 56 41
Insurance risk
Tesco Bank is indirectly exposed to insurance risks through its ownership of 49.9% of Tesco Underwriting Limited (TU), an authorised insurance company. Insurance risk is defined as the risk accepted through the provision of insurance products in return for a premium. The timing and quantum of the risks are uncertain and determined by events outside the control of Tesco Bank. The key insurance risks within TU relate to underwriting risk and reserving risk. TU operates a separate framework to ensure that the TU insurance portfolio operates within agreed risk appetite. Tesco Bank closely monitors performance of the portfolio against specific thresholds and limits.
Notes to the Group financial statements
Note 26 Customer deposits and deposits from banks
2021 2020 GBPm GBPm Customer deposits 5,738 7,707 Deposits from banks 600 500 6,338 8,207 Of which: Current 5,321 6,377 Non-current 1,017 1,830 6,338 8,207
Deposits from banks include balances of GBP500m (2020: GBP500m) drawn under the Bank of England's Term Funding Scheme (TFS) and GBP100m
(2020: GBPnil) drawn under the Bank of England's term Funding Scheme with additional incentives for Small and Medium Sized Entities (TFSME).
Note 27 Provisions
Property Restructuring Other provisions provisions provisions Total GBPm GBPm GBPm GBPm At 29 February 2020 156 64 72 292 Foreign currency translation - 3 (6) (3) Acquired through business combinations 5 - - 5 Reclassifications - (3) 38 35 Amount released in the year (24) (29) - (53) Amount provided in the year 49 31 105 185 Amount utilised in the year (4) (60) (25) (89) Transfer to disposal group classified as held for sale (51) (6) (11) (68) Unwinding of discount 1 - - 1 At 27 February 2021 132 - 173 305 The balances are analysed as follows: 2021 2020 GBPm GBPm Current 186 155 Non-current 119 137 305 292
Property provisions
Property provisions comprise onerous property provisions, including non-lease contracts related to unprofitable stores and vacant properties, remediation works, dilapidations provisions and asset retirement obligation provisions. Property provisions related to leased properties are expected to be utilised prior to the end of the leases. Refer to Note 12 for a maturity analysis of the Group's contractual undiscounted lease payments.
Restructuring provisions
Of the GBP2m net charge (GBP31m charge, GBP(29)m release) recognised in the year, GBP2m (2020: GBP43m) has been classified as an exceptional item within discontinued operations, and GBPnil (2020: GBP108m charge) has been classified within exceptional items as 'Net restructuring and redundancy costs' within continuing operations, of which GBPnil (2020: GBP95m) related to UK & ROI and GBPnil (2020: GBP13m) related to Tesco Bank. Refer to Notes 4 and 7 for further details. The restructuring provisions were fully utilised in the financial year to 27 February 2021.
Other provisions
Other provisions include a GBP88m (2020: GBPnil) provision relating to claims from Homeplus (Korea) purchasers. Refer to Note 7 for further details. Additional provisions included in other provisions are individually immaterial. The majority of provisions are expected to be utilised in the next financial year.
Notes to the Group financial statements
Note 28 Share-based payments
The Group income statement charge for the financial year recognised in respect of share-based payments is GBP69m (2020: GBP129m), which is made up of share option schemes and share bonus payments. Of this amount, GBP60m (2020: GBP113m) will be settled in equity and GBP9m (2020:
GBP16m) in cash representing National Insurance contributions.
Share option schemes
The Company had nine share option schemes in operation during the financial year, all of which are equity-settled schemes:
i. The Savings-related Share Option Scheme (1981) permits the grant to colleagues of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from colleagues of an amount between GBP5 and GBP500 per four-weekly period. Options are capable of being exercised at the end of the three or five-year period at a subscription price of not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date.
ii. The Irish Savings-related Share Option Scheme (2000) permits the grant to ROI colleagues of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from colleagues of an amount between EUR12 and EUR500 per four-weekly period. Options are capable of being exercised at the end of the three or five-year period at a subscription price of not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date.
iii. The Executive Incentive Plan (2004) permitted the grant of options in respect of Ordinary shares to selected senior executives. Options are normally exercisable between three and 10 years from the date of grant for nil consideration. No further options will be granted under this scheme.
iv. The Executive Incentive Plan (2014) permits the grant of options in respect of Ordinary shares to selected senior executives as a proportion of annual bonus following the completion of a required service period and is dependent on the achievement of corporate performance and individual targets. Options are normally exercisable between three and 10 years from the date of grant for nil consideration. Full details of this plan can be found in the Directors' remuneration report.
v. The Performance Share Plan (2011) permits the grant of options in respect of Ordinary shares to selected executives. Options are normally exercisable between the vesting date(s) set at grant and 10 years from the date of grant for nil consideration. The vesting of options will normally be conditional upon the achievement of specified performance targets over a three-year period and/or continuous employment.
vi. The Group Bonus Plan permits the grant of options in respect of Ordinary shares to selected senior executives as a proportion of annual bonus following the completion of a required service period and is dependent on the achievement of corporate performance and individual targets. Options are normally exercisable between three and 10 years from the date of grant for nil consideration. No further options will be granted under this scheme.
vii. The Long Term Incentive Plan (2015) permits the grant of options in respect of Ordinary shares to selected executives. Options are normally exercisable between the vesting date(s) set at grant and 10 years from the date of grant for nil consideration. The vesting of options will normally be conditional upon the achievement of specified performance targets over a three-year period and/or continuous employment.
viii. The Booker Group PLC Savings Related Share Option Plan (2008) (Booker SAYE) permitted the grant to Booker colleagues of options in respect of ordinary shares in Booker Group PLC (Booker Shares) linked to a building society/bank save-as-you-earn contract for a term of three years with contributions from Booker colleagues of an amount between GBP5 and GBP500 per four-weekly period. Following completion of the acquisition of Booker Group PLC by Tesco PLC, Booker colleagues elected to roll over their existing options over Booker Shares under the Booker SAYE into equivalent options over ordinary shares in Tesco PLC (Tesco Shares). The options over Tesco Shares are capable of being exercised at the end of the three-year period at a subscription price equivalent to not less than 80% of the average of the middle-market quotations of a Booker Share over the
three dealing days immediately preceding the offer date.
ix. The Booker Group PLC Performance Share Plan (2008) (Booker PSP) permitted the grant of options in respect of Booker Shares to selected Booker senior colleagues (Booker PSP Options). Under the Booker PSP, tax approved Company Share Option Plan options (Booker CSOP Options) were also granted to selected Booker senior colleagues. Following completion of the acquisition of Booker Group PLC by Tesco PLC, Booker senior colleagues elected to roll over their existing Booker PSP and Booker CSOP Options over Booker Shares into equivalent options over Tesco Shares. Booker PSP Options are normally exercisable between the third anniversary of the original date of grant and 10 years from the date of grant for nil consideration. The vesting of options is normally conditional upon the achievement of specified performance targets over a three year period and continuous employment. Conditional on the vesting of the relevant Booker PSP Options, Booker CSOP Options are normally exercisable between the third anniversary of the original date of grant and 10 years from the date of grant at a
subscription price equivalent to the market value of the Booker Shares at the time of grant.
Notes to the Group financial statements
Note 28 Share-based payments
The following tables reconcile the number of share options outstanding and the weighted average exercise price (WAEP):
For the 52 weeks ended 27 February 2021
Booker Group PLC Booker Group Savings-related Irish Savings-related Nil cost Savings Related PLC Performance Share Option Share Option Share Option Share Option Share Scheme Scheme Scheme(a) Plan Plan Scheme Other Schemes Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP Outstanding at 29 February 2020 215,812,094 175.06 6,855,613 185.35 18,455,841 - 5,100,149 151.21 4,976,236 - - - Granted 60,005,859 198.00 2,800,186 198.00 516,622 - - - - - - - Forfeited (18,268,028) 197.73 (808,107) 194.80 (3,675,500) - (271,569) 149.39 (2,257,156) - - - Exercised (91,142,849) 151.29 (1,261,423) 153.20 (8,079,580) - (4,141,825) 151.10 (1,858,323) - - - Outstanding at 27 February 2021 166,407,076 193.86 7,586,269 194.35 7,217,383 - 686,755 152.58 860,757 - - - Exercise 150.00 150.00 137.45 price range to to to (pence) 219.00 219.00 - 152.78 - - Weighted average remaining contractual life (years)(b) 2.86 2.78 5.18 0.42 - - Exercisable at 27 February 2021 4,780,919 151.11 108,223 151.00 7,217,383 686,755 152.58 860,757 - - - Exercise 150.00 150.00 137.45 - - price range to to to (pence) 219.00 219.00 152.78 Weighted average remaining contractual life (years)(b) 0.42 0.42 5.18 0.42 - -
(a) The special dividend and associated share consolidation had a neutral impact to the number of options.
(b) Contractual life represents the period from award to the scheme end date. Certain schemes may be exercised later than vesting date at the discretion of the individual.
Share options were exercised on a regular basis throughout the financial year. The average share price during the 52 weeks ended 27 February 2021 was 227.07p (2020: 237.69p).
For the 53 weeks ended 29 February 2020
Booker Irish Booker Group Group PLC Savings-related Nil cost PLC Savings Performance Savings-related Share Option Share Option Related Share Share Plan Other Schemes Share Option Scheme Scheme Scheme Option Plan Scheme * Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP Options WAEP Outstanding at 23 February 2019 215,591,248 168.04 6,470,978 175.06 25,377,129 - 9,827,705 145.36 11,222,347 - 12,379,637 - Granted 44,387,158 219,00 1,977,339 219.00 537,271 - - - - - - Forfeited (23,512,462) 200.62 (1,062,090) 187.69 (5,502,793) - (766,057) 147.40 (2,870,980) - (12,379,637) - Exercised (20,653,850) 167.18 (530,614) 180.60 (1,955,766) - (3,961,499) 137.46 (3,375,131) - - - Outstanding at 29 February 2020 215,812,094 175.06 6,855,613 185.35 18,455,841 - 5,100,149 151.21 4,976,236 - - - Exercise 150.00 150.00 - 137.13 - - price range to to to (pence) 322.00 219.00 152.78 Weighted average remaining contractual life (years) 2.09 2.55 6.39 1.32 0.51 - Exercisable at 29 February 2020 2,948,571 189.92 243,886 190.00 9,359,089 - 523,817 137.45 977,437 - - - Exercise 150.00 price range to (pence) 322.00 190.00 - 137.45 - - Weighted average remaining contractual life (years) 0.41 0.42 5.60 0.42 - -
* Other Schemes includes Approved Share Option Scheme (Approved), Unapproved Share Option Scheme (Unapproved), and International Executive Share Option Scheme (International). The WAEP for all other
schemes at 29 February 2020 was 338.40p and all options were forfeited during the year.
Notes to the Group financial statements
Note 28 Share-based payments continued
The fair value of savings related share options schemes are estimated at the date of grant using the Black-Scholes option pricing model. The following table gives the assumptions applied to the options granted in the respective periods shown. No assumption has been made to incorporate the effects of expected early exercise.
2021 2020 SAYE SAYE Expected dividend yield (%) 4.90-5.05% 3.70-4.28% Expected volatility (%) 23.00-25.60% 22.60-28.09% Risk-free interest rate (%) 0.15-0.26% 0.81-0.84% Expected life of option (years) 3 or 5 3 or 5 Weighted average fair value of options granted (pence) 27.13 38.56 Probability of forfeiture (%) 6-10% 7-10% Share price (pence) 219.60 243.00 Weighted average exercise price (pence) 198.00 219.00
Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in the Group's option pricing models is the annualised standard deviation of the continuously compounded rates of return on the share over a period of time. In estimating the future volatility of the Company's share price, the Board considers the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the option, taking into account the remaining contractual life of the option.
Share bonus and incentive schemes
Selected executives participate in the Group Bonus Plan, a performance-related bonus scheme. The amount paid to colleagues is based on a percentage of salary and is paid partly in cash and partly in shares. Bonuses are awarded to selected executives who have completed a required service period and depend on the achievement of corporate and individual performance targets.
Selected executives participate in the Performance Share Plan (2011) and the Long Term Incentive Plan (2015). Awards made under these plans will normally vest on the vesting date(s) set on the date of the award for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets over a three-year performance period and/or continuous employment.
The Executive Directors participate in short-term bonus and long-term incentive schemes designed to align their interests with those of shareholders. Full details of these schemes can be found in the Directors' remuneration report.
The fair value of shares awarded under these schemes is their market value on the date of award. Expected dividends are not incorporated into the fair value.
The number and weighted average fair value (WAFV) of share bonuses and share incentives awarded were:
2021 Number 2020 WAFV Number WAFV of shares pence of shares pence 11,496,310 237.80 39,136,637 233.77 Group Bonus Plan 15,502,105 246.70 Performance Share Plan 25,024,909 221.72
Note 29 Post-employment benefits
Pensions
The Group operates a variety of post-employment benefit arrangements, covering both funded and unfunded defined benefit schemes and defined contribution schemes.
Defined contribution
Defined contribution schemes are open to all Tesco employees in the UK.
Under the Group's defined contribution pension schemes, employees of the Group pay contributions to an independently administered fund, into which the Group also pays contributions based upon a fixed percentage of the employee's contributions. The Group has no further payment obligations once its contributions have been paid. Contributions paid for defined contribution schemes in continuing operations of GBP347m (2020: GBP329m) have been recognised in the Group income statement. This includes GBP132m (2020: GBP116m) of salaries paid as pension contributions.
Defined benefit schemes
The Group has a defined benefit pension deficit of GBP1,222m (2020: GBP3,085m), comprising a number of schemes. The most significant of these are for the Group's employees in the UK, which are closed to future accrual, and ROI. The defined benefit pension deficit in the UK represents 86% of the Group deficit (2020: 92%).
Guaranteed minimum pension
During the year, a further high court judgement was handed down regarding the Lloyd's Banking Group's defined benefit pension schemes, which affects many schemes in the UK, including the Group's UK schemes. This ruling requires pension schemes to also consider the impact of guaranteed minimum pensions (GMPs) equalisation on individual transfer payments made since May 1990. In consultation with independent actuaries, the Group recognised the financial effect of this as a one-off GBP7m exceptional past service cost in the current year. This is presented as an exceptional item in the income statement (Note 4).
Notes to the Group financial statements
Note 29 Post-employment benefits continued
United Kingdom
The principal plan within the Group is the Tesco PLC Pension Scheme (the Scheme), the assets of which are held as a segregated fund and administered by the Trustee.
The Scheme is established under trust law and has a corporate trustee (the Trustee) that is required to run the Scheme in accordance with the Scheme's Trust Deed and Rules and to comply with all relevant legislation. Responsibility for governance of the Scheme lies with the Trustee. The Trustee is a company whose directors comprise:
1. representatives of the Group; and
2. representatives of the Scheme participants, in accordance with its articles of association and UK pension law.
Scheme funding
The Group considers two measures of the pension deficit. The accounting position is shown on the Group balance sheet. The funding position, calculated at the triennial actuarial assessment, is used to agree contributions made to the schemes. The two measures will vary because they are for different purposes, and are calculated at different dates and in different ways. The key calculation difference is that the funding position considers the expected returns of scheme assets when calculating the liability, whereas the accounting position calculated under
IAS 19 discounts liabilities based on corporate bond yields.
The most recent completed triennial actuarial assessment of the Scheme was performed as at 31 December 2019 using the projected unit credit method. After the GBP2.5bn contribution in relation to the Group's sale of its operations in Thailand and Malaysia, the funding position was a surplus of GBP570m. The market value of the Scheme's assets was GBP18,492m and these assets represented 103% of the benefits that had accrued to members, after allowing for expected increases in pensions in payment.
Subsequent to this triennial actuarial assessment it was agreed that no further pension deficit contributions would be required, with contributions being assessed at the next triennial review. The GBP2.5bn contribution has significantly reduced the prospect of having to make further pension deficit contributions in the future. The Group will continue to pay GBP25m per annum to meet expenses of the Scheme, including the Pension Protection Fund levy. Additionally, as part of the triennial review it was agreed that the market value of assets held as security in favour of the Scheme would increase to at least GBP775m (2020: GBP575m).
The most recent Booker Pension Scheme triennial valuation showed a funding deficit of GBP103m at 31 March 2019, with agreed contributions of
GBP15m per annum until the end of 2028. No contributions were required for the Budgens or Londis schemes.
IFRIC 14
The Group is not required to recognise any additional liabilities in relation to funding plans, or limit the recognition of any surpluses, as any future economic benefits will be available to the Group by way of future refunds or reductions to future contributions.
Maturity profile of obligations
The estimated duration of the Scheme obligations is an indicator of the weighted average term of benefit payments after discounting. For the Scheme this is 23 years.
Around 40% of the undiscounted benefits are due to be paid beyond 30 years' time, with the last payments expected to be over 80 years from now.
The liabilities held by the Scheme are broken down as follows:
% Deferred members 78 Current pensioners 22
Notes to the Group financial statements
Note 29 Post-employment benefits continued
Risks
The Group bears a number of risks in relation to the Scheme, which are described below:
Risk Description of risk Mitigation Investment The Scheme's accounting liabilities The Trustee and the Group are calculated using a discount regularly monitor the funding rate set with reference to position and operate a diversified corporate bond yields. If investment strategy. the return on the Scheme's assets underperform this rate, The Trustee and Group take the accounting deficit will a balanced approach to investment increase. risk and have a long-term plan to significantly reduce If the Scheme's assets underperform the investment risk within the expected return for the the Scheme. funding valuation, this may require additional contributions to be made by the Group. Inflation The Scheme's benefit obligations As part of the investment are linked to inflation. A strategy, the Trustee aims higher rate of expected long-term to mitigate this risk through inflation will therefore lead investment in a liability-driven to higher liabilities, both investment (LDI) portfolio. for the IAS 19 and funding liability. The portfolio invests in assets which increase in If the Scheme's funding liability value as inflation expectations increases, this may require increase. This mitigates additional contributions to the impact of any adverse be made by the Group. movement in long-term inflation expectations. The Scheme's holdings are designed to hedge against inflation risk up to the value of the funded liabilities. Additionally, changes to future benefits were introduced in June 2012 to reduce the Scheme's exposure to inflation risk by changing the basis for calculating the rate of increase in pensions to CPI (previously RPI). Interest rate A decrease in corporate bond As part of the investment yields will increase the accounting strategy, the Trustee aims deficit under IAS 19. Similarly, to mitigate this risk through a decrease in gilt yields investment in a LDI portfolio. will have an adverse impact on the funding position of The portfolio invests in the Scheme. This may lead assets which increase in to additional contributions value as interest rates decrease. to be made by the Group. The Scheme's holdings are designed to hedge against interest rate risk up to the value of the funded liabilities. Because the aim of the portfolio is to mitigate risk for the funding position, ineffectiveness in hedging for the accounting deficit under IAS 19 can
arise where corporate bond and gilt yields diverge. This is partially offset by Scheme holdings in corporate bonds. Life expectancy The Scheme's obligations are To reduce this risk, changes to provide benefits for the to future benefits were introduced life of the member and so in June 2012 to increase increases in life expectancy the age at which members will lead to higher liabilities. can take their full pension by two years. The Trustee and Group regularly monitor the impact of changes in longevity on scheme obligations.
The operations and audit pensions committee was established to further strengthen the Group's Trustee governance and provide greater oversight and stronger internal control over the Group's risks. The Group pensions committee was also set up to provide an additional layer of governance and risk management. Further mitigation of the risks is provided by external advisors and the Trustee who consider the funding position, fund performance and impacts of any regulatory changes.
Notes to the Group financial statements
Note 29 Post-employment benefits continued
Scheme principal assumptions
Financial assumptions
The principal assumptions, on a weighted average basis, used by the actuaries to value the defined benefit obligation of the Scheme were as follows:
2021 2020 % % Discount rate 2.0 1.9 Price inflation 2.9 2.8 Rate of increase in deferred pensions* 2.5 2.0 Rate of increase in pensions in payment* Benefits accrued before 1 June 2012 2.8 2.7 Benefits accrued after 1 June 2012 2.5 2.1
* In excess of any guaranteed minimum pension (GMP) element.
Discount Rate
The discount rate for the Scheme is determined by reference to market yields of high-quality corporate bonds of suitable currency and term to the Scheme cash flows and extrapolated based on the trend observable in corporate bond yields to produce a single equivalent discount rate.
Inflation
The inflation assumption is used to determine increases in pensions linked to RPI and CPI inflation within sections of the Scheme, subject to relevant maximum and minimum increases.
RPI inflation is derived by reference to the difference between fixed-interest and index-linked long-term government bonds. To account for the premium that investors are willing to pay to mitigate the risk that inflation is higher than expected, the inflation assumption incorporates an inflation risk premium. CPI inflation is set by reference to RPI.
The government announced RPI reforms in 2019 and subsequently responded to a consultation in November 2020, with changes to align RPI with CPIH expected from 2030 onwards. The Group uses a bifurcated approach to pre- and post-2030 assumptions, reflecting the impact of the RPI reforms from 2030 onwards. In consultation with external actuaries, the inflation risk premium has been set at 0.42% (2020: 0.25%), representing the weighted average of 0.3% p.a. pre-2030 and 0.5% p.a. post-2030. The CPI differential has been set as 0.43% lower than RPI (2020: 0.80%), representing the weighted average of 1.0% p.a. pre-2030 and 0.1% p.a. post-2030.
Mortality assumptions
The Group, in consultation with an independent actuary, conducted a mortality analysis of the Scheme as part of the triennial actuarial valuation process. Subsequent to this analysis, the Group adopted the best estimate assumptions for the calculation of the IAS 19 pension liability for the main UK scheme.
The mortality assumptions used are based on tables that have been projected to 2017 with CMI 2018 improvements. In addition, the allowance for future mortality improvements from 2017 have been updated to be in line with CMI 2019, with a long-term improvement rate of 1.25% per annum.
The base tables used in calculating the mortality assumptions are different for various categories of members, as shown below:
Pensioner Non-Pensioner 90% of SAPS S3 Normal 97% of SAPS S3 Normal Male Staff Heavy Heavy 95% of SAPS S3 Normal 104% of SAPS S3 Normal Senior Manager Light Light 110% of SAPS S3 Normal 114% of SAPS S3 Normal Female Staff Heavy Heavy 95% of SAPS S3 All 100% of SAPS S3 All Senior Manager Middle Middle
The following table illustrates the expectation of life of an average member retiring at age 65 at the balance sheet date and a member reaching age 65 at the balance sheet date +25 years. A comparison between the two retiree dates illustrates the expected improvements in mortality over the next 25 years.
2021 2020 Years Years Retiring at the balance sheet date at age 65: Male 20.7 22.0 Female 22.2 23.8 Retiring at the balance sheet date +25 years at age 65: Male 22.0 23.4 Female 23.9 25.8
Sensitivity analysis of significant actuarial assumptions
The sensitivity of significant assumptions upon the Scheme defined benefit obligation are detailed below:
2021 2020 Financial Discount Inflation Discount Inflation assumptions - rate ' rate rate rate Increase/(decrease) GBPm GBPm GBPm GBPm in UK Defined Benefit Obligation Impact of 0.1% increase of the assumption (460) 400 (460) 383 Impact of 0.1% decrease of the assumption 480 (380) 479 (383) Impact of 1.0% increase of the assumption (4,038) 4,318 (4,002) 4,289 Impact of 1.0% decrease of the assumption 5,577 (3,418) 5,572 (3,313) Mortality assumptions - Increase/(decrease) in UK Defined 2021 2020 Benefit Obligation GBPm GBPm Impact of 1 year increase in longevity 900 881 Impact of 1 year decrease in longevity (920) (881)
Notes to the Group financial statements
Note 29 Post-employment benefits continued
Sensitivities are calculated by changing the relevant assumption while holding all other assumptions constant. The sensitivities reflect the range of recent assumption movements and illustrate that the financial assumption sensitivities do not move in a linear fashion. Movements in the defined benefit obligation from discount rate and inflation rate changes may be partially offset by movements in assets.
Overseas
The Group operates defined benefit schemes in ROI. An independent actuary, using the projected unit credit method, carried out the latest actuarial assessment of the ROI schemes as at 27 February 2021. At the financial year end, the IAS 19 deficit relating to ROI was GBP169m (2020:
GBP206m).
Post-employment benefits other than pensions
The Group operates a scheme offering post-retirement healthcare benefits. The cost of providing these benefits has been accounted for on a similar basis to that used for defined benefit pension schemes.
The liability as at 27 February 2021 of GBP7m (2020: GBP8m) was determined in accordance with the advice of independent actuaries. During the current financial year, GBPnil (2020: GBPnil) has been charged to the Group income statement and GBPnil (2020: GBPnil) of benefits were paid.
Plan assets
The Group's pension schemes hold assets that both provide returns and mitigate risk, including the volatility of future pension payments.
The table below shows a breakdown of the combined investments held by the Group's schemes:
2021 2020 Quoted Total Quoted Total Unquoted GBPm % Unquoted GBPm % GBPm GBPm GBPm GBPm Equities UK 89 - 89 1 255 - 255 2 Europe 889 - 889 4 746 - 746 4 Rest of the
world 4,502 - 4,502 22 4,347 - 4,347 25 5,480 - 5,480 27 5,348 - 5,348 31 Bonds Government 1,377 - 1,377 6 750 - 750 4 Corporates - investment grade 3,334 - 3,334 17 1,362 - 1,362 8 Corporates - non-investment grade 197 - 197 1 2 - 2 - 4,908 - 4,908 24 2,114 - 2,114 12 Property UK 78 1,041 1,119 6 44 1,036 1,080 6 Rest of the world 6 440 446 2 7 475 482 3 84 1,481 1,565 8 51 1,511 1,562 9 Alternative assets Hedge funds 1 312 313 2 2 304 306 2 Private equity - 1,020 1,020 5 - 881 881 5 Other 210 1,288 1,498 7 225 1,043 1,268 7 211 2,620 2,831 14 227 2,228 2,455 14 LDI portfolio 3,241 (493) 2,748 14 4,580 444 5,024 29 Cash 2,550 - 2,550 13 922 - 922 5 Total fair value of plan assets 16,474 3,608 20,082 100 13,242 4,183 17,425 100
Quoted assets are those with a quoted price in an active market. Unquoted assets are valued in accordance with IFRS13, using the most appropriate level within the fair value hierarchy based on the specifics of the asset class, and in line with industry standard guidelines, including the RICS methodology for property and the IPEV guidelines for Private Equity.
The LDI portfolio consists of assets, including gilts and index-linked gilts, of the value of GBP8,425m (2020: GBP8,115m) and associated repurchase agreements and swaps of GBP(5,677)m (2020: GBP(3,091)m). Other alternative assets include infrastructure and private credit investments. Other derivatives are included in the asset category to which they relate, reflecting the underlying nature and exposure of the derivative.
The plan assets include GBP222m (2020: GBP209m) relating to property used by the Group. Group property with net carrying value of GBP826m
(2020:GBP478m) (Note 11) and a value to the Scheme of at least GBP775m (2020: GBP575m) is held as security in favour of the Scheme.
Notes to the Group financial statements
Note 29 Post-employment benefits continued
Movement in the Group pension deficit during the financial year
Including all movements of discontinued operations up to classification as held for sale(a)
Fair value of Defined benefit Net defined plan assets obligation benefit surplus/(deficit) 2021 2020 2021 2020 2021 2020 (b) GBPm GBPm GBPm GBPm GBPm GBPm Opening balance 17,425 15,054 (20,510) (17,862) (3,085) (2,808)) Current service cost - - (41) (40) (41) (40)) Past service cost - - (7) (5) (7) (5)) Finance income/(cost) 341 409 (384) (480) (43) (71)) Included in the Group income statement 341 409 (432) (525) (91) (116)) Remeasurement gain/(loss): Financial assumptions gain/(loss) - - (1,193) (2,867) (1,193) (2,867)) Demographic assumptions gain/(loss) - - 18 182 18 182 Experience gain/(loss) - - 354 61 354 61 Return on plan assets excluding finance income (136) 2,158 - - (136) 2,158 Foreign currency translation 1 (3) (4) 5 (3) 2 Included in the Group statement of comprehensive income/(loss) (135) 2,155 (825) (2,619) (960) (464)) Member contributions 2 2 (2) (2) - - Employer contributions 34 36 - - 34 36 Additional employer contributions 2,836 262 - - 2,836 262 Benefits paid (421) (493) 436 498 15 5 Classified as held for sale - - 29 - 29 - Other movements 2,451 (193) 463 496 2,914 303 Closing balance 20,082 17,425 (21,304) (20,510) (1,222) (3,085) Deferred tax asset 218 512 Deficit in schemes at the end of the year, net of deferred tax (1,004) (2,573)
(a) Movements in the year include GBPnil relating to discontinued operations up to classification as held for sale. After classification as held for sale post-employment benefit obligations movements within discontinued operations included GBP(1)m within the Group income statement, GBP(6)m remeasurement loss in the Group statement of comprehensive income/(loss) and GBP2m in other movements.
(b) Movements in the prior year in relation to discontinued operations included GBP(8)m within the Group income statement, GBP(3)m in the Group statement of comprehensive income/(loss) and
GBP1m in other movements
Note 30 Called-up share capital
2021 2020 Number Number of of Ordinary Ordinary shares GBPm shares GBPm Allotted, called-up and fully paid: At the beginning of the year 9,793,496,561 490 9,793,496,561 490 Share consolidation (including shares issued (a) ) (2,061,788,741) - - At the end of the year 7,731,707,820 490 9,793,496,561 490
(a) To affect the share consolidation, 11 additional Ordinary shares were issued so that the total Ordinary shares is exactly divisible by 19.
On 26 February 2021, the Group paid a special dividend of GBP4.9bn to shareholders in relation to the sale of its businesses in Thailand and Malaysia. In order to maintain the comparability of the Company's share price before and after the special dividend, a share consolidation was approved at the General Meeting held on 11 February 2021. Shareholders received 15 new Ordinary shares of 6 1/3 pence each for every existing 19 Ordinary shares of 5 pence each.
No shares were issued during the current financial year in relation to share options.
The Group has a share forfeiture programme following the completion of a tracing and notification exercise to any shareholders who have not had contact with the Company over the past 12 years, in accordance with the provisions set out in the Company's Articles of Association. Under the share forfeiture programme the shares and dividends associated with shares of untraced members are forfeited, with the resulting proceeds transferred to the Group to use for good causes in line with the Group's corporate responsibility strategy. For more information on how these proceeds have been spent, please see our Little Helps Plan Report (available at www.tescoplc.com/littlehelpsplan). Du ring the current financial year, the Group received GBPnil (2020: GBPnil) proceeds from sale of untraced shares and GBPnil (2020: GBPnil) write-back of unclaimed dividends, which are reflected in share premium and retained earnings respectively.
As at 27 February 2021, the Directors were authorised to purchase up to a maximum in aggregate of 773.2 million (2020: 979.3 million) Ordinary shares before the AGM 2021 on 25 June 2021.
The holders of Ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company.
Own shares purchased
Own shares represent the shares of Tesco PLC that are held in Treasury or by the Employee Benefit Trust. Own shares are recorded at cost and are deducted from equity.
The own shares held represents the cost of shares in Tesco PLC purchased from the market and held by the Tesco International Employee Benefit Trust to satisfy share awards under the Group's share scheme plans (refer to Note 28). The number of Ordinary shares held by the Tesco International Employee Benefit Trust at 27 February 2021 was 58.4 million (2020: 87.6 million). This represents 0.76% of called-up share capital at the end of the year (2020: 0.89%).
No own shares held of Tesco PLC were cancelled during the financial years presented.
Notes to the Group financial statements
Note 31 Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures and associates are disclosed below:
Transactions
Joint venture Associate 2021 2020 2021 2020 GBPm GBPm GBPm GBPm Sales to related parties 479 491 - - Purchases from related parties 87 100 10 12 Dividends received 18 29 8 13 Injection of equity funding 14 - - 12
Sales to related parties consist of service/management fees and loan interest.
Transactions between the Group and the Group's pension plans are disclosed in Note 29.
Balances
Joint ventures Associates 2021 2020 2021 2020 GBPm GBPm GBPm GBPm Amounts owed to related parties 23 26 - - Amounts owed by related parties 40 47 - - Lease liabilities payable to related parties 2,718 3,206 144 146 Loans to related parties (net of deferred profits)* 122 127 - -
* Loans to related parties of GBP122m (2020: GBP127m) are presented net of deferred profits of GBP38m (2020: GBP54m), historically arising from the sale of property assets to joint ventures. Refer to Note 14 for further details. For loans to related parties, a 12-month expected credit loss (ECL) allowance is recorded on initial recognition. In the current and prior financial years, the ECL allowance was immaterial.
A number of the Group's subsidiaries are members of one or more partnerships to whom the provisions of the Partnerships (Accounts) Regulations 2008 (Regulations) apply. The financial statements for those partnerships have been consolidated into these financial statements pursuant to Regulation 7 of the Regulations.
Transactions with key management personnel
Members of the Board of Directors and Executive Committee of Tesco PLC are deemed to be key management personnel.
Cost of key management personnel compensation for the financial year was as follows:
2021 2020 GBPm GBPm Salaries and short-term benefits 20 20 Pensions and cash in lieu of pensions 2 2 Share-based payments 20 16 Joining costs and loss of office costs - 1 42 39 Attributable to: The Board of Directors (including Non-executive Directors) 14 10 Executive Committee (members not on the Board of Directors) 28 29 42 39
During the year 6,403,309 (2020: 8,470,986) Performance Shares and 2,615,921 (2020: 1,539,924) bonus shares were granted to key management personnel under the Performance Share Plan and Deferred Bonus Plan 2019 respectively. Vesting will be conditional on the achievement of specified performance targets over a three-year performance period and/or continuous employment. The cost of these awards will be spread over the vesting period.
Of the key management personnel who had transactions with Tesco Bank during the financial year, the following are the balances at the financial year end:
Credit card, mortgage and personal loan Current and saving balances deposit accounts Number Number of key of key management management personnel GBPm personnel GBPm At 27 February 2021 4 - 7 - At 29 February 2020 6 - 13 1
Notes to the Group financial statements
Note 32 Analysis of changes in net debt
Non-cash movements Cash flows arising Fair At 29 from Other value Interest Acquisitions At 27 February financing cash gains/ Foreign income/ and Discontinued February 2020 activities flows (losses) exchange (charge) disposals Other operations 2021 GBPm GBPm GBPm GBPm GBPm GBPm (a) GBPm GBPm GBPm GBPm Total Group Bank and other borrowings, excluding overdrafts (7,118) 716 223 (41) (2) (226) (288) - - (6,736) Lease liabilities (9,566) 621 488 - - (488) 977 (568) 134 (8,402) Net derivative financial instruments 198 580 18 (203) - (20) (118) - - 455 Arising from financing activities (16,486) 1,917 729 (244) (2) (734) 571 (568) 134 (14,683) Cash and cash equivalents in the Group balance sheet 4,137 - (1,607) - 8 - - - (28) 2,510 Overdrafts(b) (1,106) - 539 - - - - - 35 (532) Cash and cash equivalents (including overdrafts) in the Group cash flow statement 3,031 - (1,068) - 8 - - - 7 1,978 Short-term investments 1,076 - (62) - (3) - - - - 1,011 Joint venture loans 127 - 2 - - 2 (9) - - 122 Interest and other receivables 1 - (12) - - 11 - - - - Net debt of the disposal group - - - - - - - - (141) (141) Total Group (12,251) 1,917 (411) (244) 3 (721) 562 (568) - (11,713) Tesco Bank Bank and other borrowings, excluding overdrafts (1,260) 774 4 (1) - (4) - - - (487) Lease liabilities (33) 3 2 - - (2) - - - (30) Net derivative financial instruments (45) - - 3 - - - - - (42) Arising from financing (1,338) 777 6 2 - (6) - - - (559) activities Cash and cash equivalents in the Group balance sheet 1,364 - (584) - - - - - - 780 Overdrafts(b) - - - - - - - - - - Cash and cash equivalents (including overdrafts) in the Group cash flow statement 1,364 - (584) - - - - - - 780 Joint ventures loans 21 - - - - - - - - 21 Tesco Bank 47 777 (578) 2 - (6) - - - 242 Retail Bank and other borrowings, excluding overdrafts (5,858) (58) 219 (40) (2) (222) (288) - - (6,249) Lease liabilities (9,533) 618 486 - - (486) 977 (568) 134 (8,372) Net derivative financial instruments 243 580 18 (206) - (20) (118) - - 497 Arising from financing (15,148) 1,140 723 (246) (2) (728) 571 (568) 134 (14,124) activities Cash and cash equivalents in the Group balance sheet 2,773 - (1,023) - 8 - - - (28) 1,730 Overdrafts(b) (1,106) - 539 - - - - - 35 (532) Cash and cash equivalents (including overdrafts) in the Group cash flow statement 1,667 - (484) - 8 - - - 7 1,198 Short-term investments 1,076 - (62) - (3) - - - - 1,011
Joint ventures loans 106 - 2 - - 2 (9) - - 101 Interest and other receivables 1 - (12) - - 11 - - - - Net debt of the disposal group - - - - - - - - (141) (141) Net debt (12,298) 1,140 167 (246) 3 (715) 562 (568) - (11,955)
(a) Movements in Group net debt arising from the disposal of the Group's Thailand and Malaysia operations, the acquisition of The Tesco Property (No. 2) Limited Partnership and the acquisition of the trade and assets of Best Food Logistics. Refer to Notes 7 and 33 for further details.
(b) Overdraft balances are included within Bank and other borrowings in the Group balance sheet, and within Cash and cash equivalents in the Group cash flow statement. Refer to Note 20.
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.
Notes to the Group financial statements
Note 32 Analysis of changes in net debt continued
Non-cash movements Cash flows At arising Fair At 23 from Other value Interest Acquisition 29 February financing cash gains/ Foreign income/ of joint February 2019 activities flows (losses) exchange (charge) venture(a) Other 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm Total Group Bank and other borrowings, excluding overdrafts (6,794) 484 255 (192) 2 (251) (622) - (7,118) Lease liabilities (10,505) 634 541 - 1 (541) 455 (151) (9,566) Net derivative financial instruments 591 17 7 (208) - 14 (223) - 198 Arising from financing (16,708) 1,135 803 (400) 3 (778) (390) (151) (16,486) activities Cash and cash equivalents in the Group balance sheet 4,227 - (48) - (42) - - - 4,137 Overdrafts(b) (1,660) - 554 - - - - - (1,106) Cash and cash equivalents (including overdrafts) in the Group cash flow statement 2,567 - 506 - (42) - - - 3,031 Short-term investments 390 - 687 - (1) - - - 1,076 Joint venture loans 133 - (8) - - 2 - - 127 Interest and other receivables 1 - (18) - (1) 19 - - 1 Total Group (13,617) 1,135 1,970 (400) (41) (757) (390) (151) (12,251) Tesco Bank Bank and other borrowings, excluding overdrafts (1,421) 160 5 1 - (5) - - (1,260) Lease liabilities (35) 2 3 - - (3) - - (33) Net derivative financial instruments (29) - - (16) - - - - (45) Arising from financing (1,485) 162 8 (15) - (8) - - (1,338) activities Cash and cash equivalents in the Group balance sheet 1,043 - 321 - - - - - 1,364 Overdrafts(b) - - - - - - - - - Cash and cash equivalents (including overdrafts) in the Group cash flow statement 1,043 - 321 - - - - - 1,364 Joint ventures loans 29 - (8) - - - - - 21 Tesco Bank (413) 162 321 (15) - (8) - - 47 Retail Bank and other borrowings, excluding overdrafts (5,373) 324 250 (193) 2 (246) (622) - (5,858) Lease liabilities (10,470) 632 538 - 1 (538) 455 (151) (9,533) Net derivative financial instruments 620 17 7 (192) - 14 (223) - 243 Arising from financing (15,223) 973 795 (385) 3 (770) (390) (151) (15,148) activities Cash and cash equivalents in the Group balance sheet 3,184 - (369) - (42) - - - 2,773 Overdrafts(b) (1,660) - 554 - - - - - (1,106) Cash and cash equivalents (including overdrafts) in the Group cash flow statement 1,524 - 185 - (42) - - - 1,667 Short-term investments 390 - 687 - (1) - - - 1,076 Joint ventures loans 104 - - - - 2 - - 106 Interest and other receivables 1 - (18) - (1) 19 - - 1 Net debt (13,204) 973 1,649 (385) (41) (749) (390) (151) (12,298)
(a) Movements in Group net debt arising from the acquisition of The Tesco Atrato Limited Partnership.
(b) Overdraft balances are included within Bank and other borrowings in the Group balance sheet, and within Cash and cash equivalents in the Group cash flow statement. Refer to Note 20.
Notes to the Group financial statements
Note 32 Analysis of changes in net debt continued
Reconciliation of net cash flow to movement in Net debt
2021 2020 GBPm GBPm Net increase/(decrease) in cash and cash equivalents including overdrafts (1,068) 506 Elimination of Tesco Bank movement in cash and cash equivalents including overdrafts 584 (321)) Retail cash movement in other Net debt items: Net increase/(decrease) in short-term investments (62) 687 Net increase/(decrease) in joint venture loans 2 - Net (increase)/decrease in borrowings and lease liabilities 560 956 Net cash flows from derivative financial instruments 580 17 Net interest paid on components of Net debt 711 777 Change in Net debt resulting from cash flow 1,307 2,622 Retail net interest charge on components of Net debt (715) (749) Retail fair value and foreign exchange movements (243) (426) Retail other non-cash movements (568) (151) Acquisition of property joint venture (Note 33) (161) (390) Acquisition of Best Food Logistics (Note 33) (42) - Disposal of the Asia business (Note 7) 765 - Increase)/ decrease in Net debt 343 906 Opening Net debt (12,298) (13,204) Closing Net debt* (11,955) (12,298)
* Refer to page 130 for a reconciliation from Net debt (Retail net debt) shown above to the Group's 52-week alternative performance measure.
Note 33 Acquisitions
Acquisition of Best Food Logistics
On 7 March 2020, the Group acquired the trade and assets of Best Food Logistics (trading name of BFS Group Ltd), which has been accounted for as an acquisition of a business in accordance with IFRS 3 'Business Combinations'. Best Food Logistics provides a food supply chain and logistics services to national fast food and casual dining clients. The acquisition builds on the Group's expertise in wholesale operations in the UK market and will further enhance its foodservice offer to customers within procurement, warehousing and distribution solutions. The purchase consideration received by the Group of GBP15m was fully satisfied by cash. There is no deferred or
contingent consideration.
The fair value of the assets and liabilities recognised as a result of the acquisition of Best Food Logistics are as follows:
GBPm Acquired intangible assets 4 Property, plant and equipment 12 Right of use assets 41 Inventories 27 Trade and other receivables 77 Trade and other payables (128) Lease liabilities (42) Deferred tax liabilities (2) Provisions (5) Total assets and liabilities acquired (16) Goodwill 1 Purchase consideration received (15)
The goodwill is primarily attributable to synergies. None of the goodwill is expected to be deductible for tax purposes.
Acquired intangible assets comprise software of GBP1m and customer relationships of GBP3m, which are amortised over 3 years. The amortisation charge on the acquired intangibles is excluded from the Group's operating profit before exceptional items and amortisation of acquired intangibles.
The fair value of acquired trade and other receivables is GBP77m. The gross contractual amount for trade receivables due was GBP78m, of which GBP1m is expected to be uncollectable.
Best Food Logistics contributed revenues of GBP715m and net loss after tax of GBP14m to the Group from 7 March 2020 to 27 February 2021. The GBP14m loss includes GBP1m of amortisation expense on acquired intangible assets. If the acquisition had occurred on 1 March 2020, Group revenue and net loss after tax for the 52 weeks ended 27 February 2021 would not be materially different. Transaction costs of GBPnil have been included in Administrative expenses for the 52 weeks ended 27 February 2021 (53 weeks ended 29 February 2020: GBP2m).
Acquisition of property joint venture - The Tesco Property (No. 2) Limited Partnership
On 18 September 2020, the Group obtained control of The Tesco Property (No. 2) Limited Partnership (the partnership), previously accounted for as a joint venture, through the acquisition of the other partner's 50% interest for GBP54m. The partnership had bond and derivative liabilities, and owns 12 stores and two distribution centres, which the partnership previously leased to the Group. The acquisition, which has been treated as an asset acquisition, increased the Group's owned property portfolio and borrowings, replacing the Group's associated right of use assets and lease liabilities, which are eliminated on consolidation.
Notes to the Group financial statements
The table below sets out the values to the Group in respect of obtaining control of the partnership:
Notes GBPm Property, plant and equipment 11 492 Cash and cash equivalents 2 Borrowings 32 (288) Derivative liabilities 32 (118) Joint venture partnership loans payable to the parent (49) Deferred tax asset 19 Total assets and liabilities acquired 58 Consideration paid in cash and cash equivalents 54 Joint venture loan receivable from the other former joint venture partner (25) Net consideration paid 29 Revaluation of the Group's original 50% investment 29 Total cost 58
The Group recognised the following gains and losses as an exceptional item within cost of sales on the Group income statement. The related tax charge of GBP23m has also been classified as an exceptional item. Refer to Note 4 for further details.
Notes GBPm Revaluation of the Group's original 50% investment 29 Impairment of property, plant and equipment acquired 15 (32) Derecognition of the Group's lease liabilities with the partnership 32 254 Derecognition of the Group's right of use assets with the partnership 12 (130) Derecognition of dilapidation provisions and other consolidation adjustments on acquisition 13 Total exceptional gain within cost of sales 134 Taxation - exceptional 4 (23) Total exceptional gain after taxation 111
Note 34 Commitments and contingencies
Capital commitments
At 27 February 2021, there were commitments for capital expenditure contracted for, but not incurred, of GBP203m (2020: GBP140m), principally relating to store development.
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.
In July and August 2020, the Group settled claims brought by two claimant groups against Tesco PLC for matters arising out of or in connection with the overstatement of profit announced in 2014. As a result of the settlement and associated legal costs, Tesco has taken a one-off charge in the amount of GBP93 million. Two claimant law firms issued proceedings against the Group in September 2020 in respect of the same matters. The Group will vigorously defend any further proceedings. The merit, likely outcome and potential impact on the Group of any further litigation that 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 27 February 2021. There are substantial legal and factual defences to these claims and the Group will vigorously defend any further proceedings.
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 Partners and Canada Pension Plan Investment Board as the purchasers of Homeplus, undertook to procure Tesco PLC's release from these guarantees following the disposal of Homeplus. At 27 February 2021, four guarantees remained outstanding. This liability decreases over time with all relevant leases expiring in the period between 2027 and 2031. The maximum potential liability under these outstanding guarantees is between KRW 110bn (GBP70m) and KRW 189bn (GBP121m). In the event that the guarantees are called, the potential economic outflow is estimated at KRW 73bn (GBP46m), with funds of KRW 32bn (GBP20m) placed in escrow to provide the payment mechanism for these guarantees. The net potential outflow to Tesco is therefore estimated at KRW 41bn (GBP26m). Additionally, Tesco PLC has the benefit of an indemnity from the purchasers of Homeplus for any claims made over and above the amounts in escrow.
Following the sale of Homeplus for GBP4.2bn in 2015, Tesco PLC has received claims from the purchasers relating to the sale of the business. In July 2015, an arbitral tribunal tribunal dismissed the majority of the claims. It made findings of liability in relation to the remaining claims but reserved its position in relation to quantum. The parties are in the process of making submissions on the damages that should be awarded in relation to the remaining claims. A provision in the amount of GBP88m has been recognised in the accounts.
Notes to the Group financial statements
As previously reported, Tesco Stores Limited has received claims from current and former Tesco store colleagues alleging that their work is of equal value to that of colleagues working in Tesco's distribution centres and that differences in terms and conditions relating to pay are not objectively justifiable. The claimants are seeking the differential between the pay terms looking back, and equivalence of pay terms moving forward. At present, the likely number of claims that may be received and the merit, likely outcome and potential impact on the Group of any such litigation 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. There are substantial factual and legal defences to these claims and the Group intends to vigorously defend them.
Subsidiary audit exemptions
The following UK subsidiary undertakings are exempt from the requirements of the Companies Act 2006 (the Act) relating to the audit of individual accounts by virtue of section 479A of the Act.
Company Company Company Name number Name Number Name Number Buttoncable Limited 5294246 T & S Stores Limited 1228935 Tesco PENL Limited 6479938 Tesco Red (3LP) Buttoncase Limited 5298861 Tapesilver Limited 5205362 Limited 10127765 Day and Nite Stores Tesco Aqua (GP) Limited 1746058 Limited 5721654 Tesco Red (GP) Limited 5721630 Dillons Newsagents Tesco Brislington Tesco TLB Properties Limited 140624 Limited 10701640 Limited 3159425 Dunnhumby Holding Tesco Family Dining The Tesco Aqua Limited Limited 8071909 Limited 8514605 Partnership LP011520 Tesco Food Sourcing The Tesco Red Limited Launchgrain Limited 5260856 Limited 7502096 Partnership LP011522 Oakwood Distribution Tesco Freetime Limited 5721635 Limited 4345023 Spen Hill Development Tesco Gateshead Limited 4827219 Property Limited 8312532 Spen Hill Management Limited 2460426 Tesco Mobile Communications 4780729 Spen Hill Properties Tesco Mobile Services (Holdings) PLC 2412674 Limited 04780734
Spen Hill Regeneration Limited 6418300 Tesco PEG Limited 6480309
Tesco PLC will guarantee all outstanding liabilities that these subsidiaries are subject to as at the financial year ended 27 February 2021 in accordance with section 479C of the Act, as amended by the Companies and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012. In addition, Tesco PLC will guarantee any contingent and prospective liabilities that these subsidiaries are subject to.
Subject to and with effect from an amendment to the Companies Act of Ireland 2014 coming into force which permits Irish incorporated subsidiaries of an English incorporated company to avail of section 537, Tesco PLC has irrevocably guaranteed the liabilities and commitments of the following Irish subsidiary undertakings: Chirac Limited; Cirrus Finance (2009) Limited; Clondalkin Properties Limited; Commercial Investments Limited; Edson Investments Limited; Edson Properties Limited; Monread Developments Limited; Nabola Development Limited; Orpingford; Pharaway Properties Limited; R.J.D. Holdings; Tesco Ireland Holdings Limited; Tesco Ireland Limited; Tesco Ireland Pension Trustees Limited; Tesco Mobile Ireland Limited; Tesco Trustee Company of Ireland Limited; Thundridge; Wanze Properties (Dundalk) Limited; WSC Properties Limited.
Tesco Bank
At 27 February 2021, Tesco Bank had contractual lending commitments totalling GBP12.7bn (2020: GBP11.9bn). The contractual amounts represent the amounts that would be at risk should the available facilities be fully drawn upon and not the amounts at risk at the reporting date.
Note 35 Tesco Bank capital resources
The following tables analyse the regulatory capital resources of Tesco Personal Finance PLC (TPF), being the regulated entity at the balance sheet date:
2021 2020 GBPm GBPm Common equity tier 1 capital: Shareholders' funds and non-controlling interests, net of tier 1 regulatory adjustments 1,443 1,567 Tier 2 capital: Qualifying subordinated debt 235 235 Other interests - - Total tier 2 regulatory adjustments (21) (21) Total regulatory capital 1,657 1,781
On 27 June 2013, the final Capital Requirements Directive IV (CRD IV) rules were published in the Official Journal of the European Union. Following the publication of the CRD IV rules, the Prudential Regulation Authority (PRA) issued a policy statement on 19 December 2013 detailing how the rules will be enacted within the UK with corresponding timeframes for implementation. The CRD IV rules are currently being phased in.
It is the Group's policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, the Group has regard to the supervisory requirements of the PRA.
Note 36 Events after the reporting period
During the year, the Board approved plans to dispose of the Group's operations in Poland. The disposal of the Group's corporate business in Poland completed after the balance sheet date on 16 March 2021. Refer to Notes 1 and 7 for details of the Group's operations in Poland classified as held for sale at the balance sheet date.
Tesco PLC - Parent Company balance sheet
27 February 29 February 2021 2020 Notes GBPm GBPm Non-current assets Investments 6 16,963 17,829 Receivables 7 259 1,043 Derivative financial instruments 10 1,536 1,167 18,758 20,039 Current assets Receivables 7 1,514 547 Cash in hand 96 249 1,610 796 Current liabilities Borrowings 9 (463) (43) Payables 8 (810) (238) (1,273) (281) Net current assets/(liabilities) 337 515 Non-current liabilities Borrowings 9 (1,415) (2,285) Payables 8 (1,293) (82) Derivative financial instruments 10 (630) (735) (3,338) (3,102) Net assets 15,757 17,452 Equity Share capital 13 490 490 Share premium 5,165 5,165 All other reserves 2,972 2,950 Retained earnings (including profit/(loss) for the financial year of GBP4,250m (2020: GBP(21)m) 7,130 8,847 Total equity 15,757 17,452
The notes on pages 111 to 116 form part of these financial statements.
Ken Murphy Alan Stewart Directors
The Parent Company financial statements on pages 109 to 116 were approved and authorised for issue by the Directors on 13 April 2021.
Tesco PLC
Registered number 00445790
Tesco PLC - Parent Company statement of changes in equity
All other reserves Capital Cost of Own Share Share Redemption hedging Hedging shares Merger Retained Total capital premium reserve reserve reserve held reserve earnings equity GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm At 29 February 2020 490 5,165 16 (19) 153 (250) 3,050 8,847 17,452 Profit/(loss) for the year - - - - - - - 4,250 4,250 Other comprehensive income/(loss) Gains/(losses) on cash flow hedges - - - 20 (18) - - - 2 Reclassified and reported in the Company income statement - - - - (47) - - - (47) Tax relating to components of other comprehensive income - - - (1) 6 - - - 5 Total other comprehensive income/(loss) - - - 19 (59) - - - (40) Total comprehensive income/(loss) - - - 19 (59) - - 4,250 4,210 Transactions with owners Purchase of own shares - - - - - (246) - - (246) Share-based payments - - - - - 308 - (75) 233 Dividends - - - - - - - (5,892) (5,892) Total transactions with owners - - - - - 62 - (5,967) (5,905) At 27 February 2021 490 5,165 16 - 94 (188) 3,050 7,130 15,757 All other reserves Capital Cost of Own Share Share Redemption hedging Hedging shares Merger Retained Total capital premium reserve reserve reserve held reserve earnings equity GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm At 23 February 2019 490 5,165 16 (13) 95 (179) 3,050 9,468 18,092 Profit/(loss) for the year - - - - - - - (21) (21) Other comprehensive income/(loss) Gains/(losses) on cash flow hedges - - - (7) 92 - - - 85 Reclassified and reported in the Company income statement - - - - (23) - - - (23) Tax relating to components of other comprehensive income - - - 1 (11) - - - (10) Total other comprehensive income/(loss) - - - (6) 58 - - - 52 Total comprehensive income/(loss) - - - (6) 58 - - (21) 31 Transactions with owners Purchase of own shares - - - - - (221) - - (221) Share-based payments - - - - - 150 - 56 206 Dividends - - - - - - - (656) (656) Total transactions with owners - - - - - (71) - (600) (671) At 29 February
2020 490 5,165 16 (19) 153 (250) 3,050 8,847 17,452
The Company has considered the profits available for distribution to shareholders. At 27 February 2021, the Company had retained earnings of GBP7.1bn, of which the unrealised profit elements are GBP1.6bn of share-based payment reserves and GBP0.7bn of dividends received from subsidiary undertakings not yet settled by qualifying consideration. After deducting the cost of its own shares held in trust of GBP0.2bn, the Company had profits available for distribution of GBP4.6bn.
The notes on pages 111 to 116 form part of these financial statements.
Notes to the Parent Company financial statements
Note 1 Authorisation of financial statements and statement of compliance with FRS 101
The Parent Company financial statements for the 52 weeks ended 27 February 2021 were approved by the Board of Directors on 13 April 2021 and the Company balance sheet was signed on the Board's behalf by Ken Murphy and Alan Stewart.
These financial statements were prepared in accordance with Financial Reporting Standard 101, 'Reduced Disclosure Framework' (FRS 101). The Company meets the definition of a qualifying entity under FRS 100, 'Application of Financial Reporting Requirements' as issued by the Financial Reporting Council.
The Company's financial statements are presented in Pounds Sterling, its functional currency, generally rounded to the nearest million.
The principal accounting policies adopted by the Company are set out in Note 2. The financial statements have been prepared under the historical cost convention, except for certain financial instruments and share-based payments that have been measured at fair value.
Note 2 Accounting policies
Basis of preparation of financial statements
The Parent Company financial statements have been prepared in accordance with FRS 101 and the Companies Act 2006 (the Act).
FRS 101 sets out a reduced disclosure framework for a 'qualifying entity' as defined in the standard which addresses the financial reporting requirements and disclosure exemptions in the individual financial statements of qualifying entities that otherwise apply the recognition, measurement and disclosure requirements of adopted IFRS.
The financial year represents the 52 weeks to 27 February 2021 (prior financial year 53 weeks to 29 February 2020).
As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to business combinations, financial instruments, capital management, presentation of comparative information in respect of certain assets, presentation of a cash flow statement, impairment of assets, share-based payments and related party transactions. Where required, equivalent disclosures are given in the consolidated financial statements of Tesco PLC.
The Parent Company financial statements are prepared on a going concern basis as set out in Note 1 of the consolidated financial statements of Tesco PLC.
The Directors have taken advantage of the exemption available under section 408 of the Companies Act 2006 and not presented an income statement or a statement of comprehensive income for the Company alone.
A summary of the Company's significant accounting policies is set out below.
Investments in subsidiaries and joint ventures
Investments in subsidiaries and joint ventures are stated at cost less, where appropriate, provisions for impairment. The Company tests the investment balances for impairment annually or when there are indicators of impairment.
Foreign currencies
Transactions in foreign currencies are translated to the functional currency at the exchange rate on the date of the transaction. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated to the functional currency at the rates prevailing on the balance sheet date.
Share-based payments
The fair value of employee share option plans is calculated at the grant date using the Black-Scholes or Monte Carlo model. The resulting cost is charged to the Company income statement over the vesting period. The value of the charge is adjusted to reflect expected and actual levels of vesting. Where the Company awards shares or options to employees of subsidiary entities, this is treated as a capital contribution.
Own shares held
Own shares represent the shares of Tesco PLC that are held in Treasury or by the Employee Benefit Trust. The Company adopts a 'look-through' approach which, in substance, accounts for the trust as an extension of the Company. Own shares are recorded at cost and are deducted from equity.
Financial instruments
Financial assets and financial liabilities are recognised in the Company balance sheet when the Company becomes party to the contractual provisions of the instrument.
Receivables
Receivables are recognised initially at fair value, and subsequently at amortised cost using the effective interest rate method, less any expected credit losses.
Financial liabilities and equity instruments
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that gives a residual interest in the assets of the Company after deducting all of its liabilities. Equity instruments issued by the Company are recorded as the proceeds received, net of direct issue costs.
Interest-bearing borrowings
Interest-bearing bank loans and overdrafts are initially recognised at fair value and net of attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any differences between proceeds and redemption value being recognised in the Company income statement over the period of the borrowings on an effective interest basis.
Payables
Payables are recognised initially at fair value, and subsequently at amortised cost using the effective interest rate method.
Notes to the Parent Company financial statements continued
Note 2 Accounting policies continued
Derivative financial instruments and hedge accounting
The Company uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operating, financing and investing activities. The Company does not hold or issue derivative financial instruments for trading purposes.
Derivative financial instruments are recognised and stated at fair value. Where derivatives do not qualify for hedge accounting, any gains or losses on remeasurement are immediately recognised in the Company income statement. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the hedge relationship and the item being hedged. In order to qualify for hedge accounting, the Company is required to document from inception, the relationship between the item being hedged and the hedging instrument.
The Company is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an ongoing basis. This effectiveness testing is performed at each reporting date to ensure that the hedge remains highly effective.
Derivative financial instruments with maturity dates of more than one year from the reporting date are disclosed as non-current.
Fair value hedging
Derivative financial instruments are classified as fair value hedges when they hedge the Company's exposure to changes in the fair value of a recognised asset or liability. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Company income statement, together with any changes in the fair value of the hedged item that is attributable to the hedged risk.
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to the Company income statement over the remaining period to maturity.
Cash flow hedging
Derivative financial instruments are classified as cash flow hedges when they hedge the Company's exposure to variability in cash flows that are either attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecasted transaction. The effective element of any gain or loss from remeasuring the derivative designated as the hedging instrument is recognised directly in the Company statement of comprehensive income and accumulated in the hedging reserve. Any cost of hedging, such as the change in fair value related to forward points and currency basis adjustment is separately accumulated in the cost of hedging reserve. The ineffective element is recognised immediately in the Company income statement.
The associated cumulative gain or loss is reclassified from other comprehensive income and recognised in the Company income statement in the same period or periods during which the hedged transaction affects the Company income statement. The classification of the effective portion when recognised in the Company income statement is the same as the classification of the hedged transaction. Any element of the remeasurement criteria of the derivative instrument which does not meet the criteria for an effective hedge is recognised immediately in the Company income statement within finance income or costs.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in the Company statement of changes in equity until the forecasted transaction occurs or the original hedged item affects the Company income statement. If a forecast hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in the Company statement of changes in equity is reclassified to the Company income statement.
Pensions
The Company participates in defined benefit pension schemes. The Company cannot identify its share of the underlying assets and liabilities of the schemes. Accordingly, as permitted by IAS 19 'Employee benefits', the Company has accounted for the schemes as defined contribution schemes, with the schemes recognised in another Group company, Tesco Stores Limited, as per Group policy.
The Company also participates in a defined contribution scheme open to all UK employees. Payments to this scheme are recognised as an expense as they fall due.
Taxation
The tax expense included in the Company income statement consists of current and deferred tax.
Current tax is the expected tax payable on the taxable income for the financial year, using tax rates enacted or substantively enacted by the balance sheet date. Tax expense is recognised in the Company income statement except to the extent that it relates to items recognised in the Company statement of comprehensive income or directly in the Company statement of changes in equity, in which case it is recognised in the Company statement of comprehensive income or directly in the Company statement of changes in equity, respectively.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset realised based on the tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited in the Company income statement, except when it relates to items charged or credited directly to equity or other comprehensive income/(loss), in which case the deferred tax is also recognised in equity, or other comprehensive income/(loss), respectively.
Notes to the Parent Company financial statements continued
Note 2 Accounting policies continued
Judgements and sources of estimation uncertainty
The preparation of the Company financial statements requires management to make judgements, estimates and assumptions in applying the Company's accounting policies to determine the reported amounts of assets, liabilities, income and expenses.
The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis, with revisions to accounting estimates applied prospectively.
The preparation of the Company financial statements for the financial year did not require the exercise of any critical accounting judgements apart from those involving estimates discussed below.
Key sources of estimation uncertainty
The key assumptions about the future, and other key sources of estimation uncertainty at the reporting period end that may have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are:
Impairment of investment in Tesco Bank
The key source of estimation uncertainty is in relation to the Company's investment in Tesco Personal Finance Group PLC (Tesco Bank). The Company considers impairment of its investments in subsidiaries based on the value in use of the subsidiary. Value in use is calculated from cash flow projections based on the Group's three-year internal forecasts. The forecasts are extrapolated to five years based on management's expectations, and beyond five years based on estimated long-term growth rates. See Note 6.
New standards and amendments effective for the current financial year
- 'Definition of a business' amendment to IFRS 3, 'Business combinations' guidance has been applied when evaluating whether acquisitions in the period are asset acquisitions or business combinations.
- 'Interest rate benchmark reform' phase 2 amendments, which have been adopted early. Refer to Note 25 to the Group financial statements for the impact of IBOR Reform amendments on the Company.
- FRS 101 amendments 'UK exit from the European Union' have been early adopted.
Other standards and amendments
Refer to Note 1 to the Group financial statements.
Note 3 Auditor remuneration
Fees payable to the Company's auditor for the audit of the Company and Group financial statements are disclosed in Note 3 to the Group financial statements.
Note 4 Dividends
For details of dividends see Note 8 to the Group financial statements.
Note 5 Employment costs, including Directors' remuneration
2021 2020 Notes GBPm GBPm Wages and salaries 17 16 Social security costs 2 2 Pension costs 12 1 2 Share-based payment expense 11 4 7 Total 24 27
The amounts above include recharges from other Group companies for Tesco PLC-related activities.
The average number of employees (all Directors of the Company) during the financial year was 13 (2020: 13).
Note 6 Investments
2021 GBPm Cost At 29 February 2020 20,686 Capital contributions 61 Return of capital contributions (684) At 27 February 2021 20,063 Accumulated impairment losses At 29 February 2020 (2,857) Impairment (243) At 27 February 2021 (3,100) Net carrying value At 27 February 2021 16,963 At 29 February 2020 17,829
The impairment losses of GBP243m includes the GBP234m impairment of its subsidiary holding company Cheshunt Holdings Guernsey Limited to a recoverable amount of GBP7m based on remaining net assets subsequent to a dividend payment, and GBP9m relating to immaterial impairments in various small holding companies.
Notes to the Parent Company financial statements continued
Note 6 Investments continued
The key source of estimation uncertainty is in relation to the Company's investment in Tesco Personal Finance PLC (Tesco Bank), for which no impairment was required. The impairment review for the Company's investments was performed using the same projections used in the impairment review performed in relation to the Group's goodwill. Details, including sensitivity analyses showing the impact of the reasonably possible changes in key assumptions upon the value in use of Tesco Bank, are disclosed in Note 15 in the Group financial statements.
The list of the Company's subsidiary undertakings and joint ventures is shown on pages 117 to 121.
Note 7 Receivables
2021 2020 GBPm GBPm Amounts owed by Group undertakings* 1,737 1,530 Amounts owed by joint ventures and associates - 24 Other receivables 36 36 Total receivables 1,773 1,590 Of which: Current 1,514 547 Non-current 259 1,043 1,773 1,590
* Amounts owed by Group undertakings are either interest-bearing or non interest-bearing depending on the type and duration of the receivable relationship, with interest rates ranging from 0.7% to 8.3%, with maturities up to and including January 2032.
The expected credit loss on receivables is immaterial (2020: immaterial).
Note 8 Payables
2021 2020 GBPm GBPm Amounts owed to Group undertakings* 2,017 278 Other payables 60 11 Taxation and social security 4 4 Deferred tax liability 22 27 Total payables 2,103 320 Of which: Current 810 238 Non-current 1,293 82 2,103 320
* Amounts owed to Group undertakings are either interest-bearing or non interest-bearing depending on the type and duration of the creditor relationship, with interest rates ranging from 0.6% to 1.1%, with maturities up to and including February 2051.
The deferred tax liability recognised by the Company, and the movements thereon, during the current financial year are as follows:
Other Financial timing instruments differences Total GBPm GBPm GBPm At 29 February 2020 (27) - (27) Movement in other comprehensive income for the year 5 - 5 At 27 February 2021 (22) - (22)
Note 9 Borrowings
2021 2020 Par value Maturity GBPm GBPm Bank loans and overdrafts 21 43 6.125% MTN GBP417m Feb 2022 417 416 5% MTN (a) GBP93m Mar 2023 79 103 3.322% LPI MTN (b) GBP354m Nov 2025 364 358 6% MTN (a) GBP48m Dec 2029 45 58 5.5% MTN (a) GBP109m Jan 2033 80 133 1.982% RPI MTN (c) GBP294m Mar 2036 302 297 6.15% USD Bond (a) $525m Nov 2037 333 555 4.875% MTN (a) GBP20m Mar 2042 14 20 5.125% MTN (a) EUR356m Apr 2047 209 316 5.2% MTN (a) GBP30m Mar 2057 14 29 1,878 2,328 Of which: Current 463 43 Non-Current 1,415 2,285 1,878 2,328
(a) During the year, the Group undertook a tender for outstanding bonds and as a result the following notional amounts were repaid early, 5% MTN Mar 2023 GBP22m, 6% MTN Dec 2029 GBP10m, 5.5% MTN Jan 2033 GBP42m, 6.15% USD Bond Nov 2037 $170m, 4.875% MTN Mar 2042 GBP6m, 5.125% MTN Apr
2047 EUR121m and 5.2% MTN Mar 2057 GBP16m.
(b) The 3.322% 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%.
(c) The 1.982% RPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN.
Notes to the Parent Company financial statements continued
Note 10 Derivative financial instruments
2021 2020 Asset Liability Asset Liability Fair value Notional Fair value Notional Fair value Notional Fair value Notional GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm Fair value hedges Interest rate swaps and similar instruments 9 65 - - 10 65 - - Cross-currency swaps - - - - 228 409 - - Cash flow hedges Cross-currency swaps - - - - 208 306 - - Index-linked swaps 199 660 - - 185 649 - - Derivatives not in a formal hedge relationship Cross-Currency Swaps 266 372 (3) 86 - - - - Index-linked swaps 1,062 4,006 (627) 3,964 536 3,339 (735) 4,461 Total 1,536 5,103 (630) 4,050 1,167 4,768 (735) 4,461
Note 11 Share-based payments
The Company's equity-settled share-based payment schemes comprise various share schemes designed to reward Executive Directors.
For further information on these schemes, including the valuation models and assumptions used, refer to Note 28 to the Group financial statements.
Share option schemes
The number of options and weighted average exercise price (WAEP) of share option schemes relating to the Company employees are:
For the 52 weeks ended 27 February 2021
Savings-related Share Option Nil cost Scheme share options Options WAEP Options WAEP Outstanding at 29 February 2020 19,148 188.00 10,633,867 - Granted(a) - - 318,623 - Forfeited (9,574) - (1,587,596) - Exercised - - (6,224,090) - Outstanding at 27 February 2021 9,574 188.00 3,140,804 - Exercise price range (pence) - 188.00 - - Weighted average remaining contractual life (years) - 1.01 - 5.05 Exercisable at 27 February 2021 - - 3,140,804 - Exercise price range (pence) - - - - Weighted average remaining contractual life (years) - - - 5.05
(a) The special dividend and associated share consolidation had a neutral impact to the number of options.
For the 53 weeks ended 29 February 2020
Savings-related Share Option Nil cost Scheme share options Options WAEP Options WAEP Outstanding at 23 February 2019 19,148 188.00 12,743,733 - Granted - - 295,554 - Forfeited - - (2,405,420) - Exercised - - - - Outstanding at 29 February 2020 19,148 188.00 10,633,867 - 188.00 - - Exercise price range (pence) Weighted average remaining contractual life - (years) - 2.01 - 6.15 Exercisable at 29 February 2020 - - 6,454,736 - - Exercise price range (pence) Weighted average remaining contractual life - (years) - 5.46
Share bonus and incentive schemes
Executive Directors participate in the Group Bonus Plan, a performance-related bonus scheme . The amount paid is based on a percentage of salary and is paid partly in cash and partly in shares. Bonuses are awarded to Executive Directors who have completed a required service period and depend on the achievement of the corporate and individual performance targets. For further information on these schemes, including the valuation models and assumptions used, refer to Note 28 to the Group financial statements.
The number and weighted average fair value (WAFV) of share bonuses awarded during the financial year were:
2021 2020 Number WAFV Number WAFV of shares pence of shares pence Group Bonus Plan 777,044 246.7 506,768 244.1 Performance Share Plan 990,404 221.6 2,388,395 230.3 Notes to the Parent Company financial statements continued
Note 12 Pensions
The total cost of participation in the Tesco Retirement Savings Plan (a defined contribution scheme) to the Company was GBP1m (2020: GBP2m). Further disclosure relating to all schemes can be found in Note 29 to the Group financial statements.
Note 13 Called up share capital
Refer to Note 30 to the Group financial statements.
Note 14 Contingent liabilities
In addition to the contingent liabilities shown in Note 34 to the Group financial statements, the Company has entered into financial guarantee contracts to guarantee the indebtedness of Group undertakings amounting to GBP3,200m (2020: GBP2,589m). It has also guaranteed derivative agreements of Group undertakings with a gross liability of GBP790m (2020: GBP168m) at the reporting date. These guarantees are treated as contingent liabilities until it becomes probable they will be called upon.
In addition, the Company has guaranteed the rental payments of certain Group undertakings relating to a portfolio of retail stores, distribution centres and mixed-use retail developments.
The likelihood of the above items being called upon is considered remote.
Note 15 Events after the reporting period
During the year, the Board approved plans to dispose of the Group's operations in Poland. The disposal of the Group's corporate business in Poland completed after the balance sheet date on 16 March 2021. Refer to note 36 of the Group financial statements for further details.
Related undertakings of the Tesco Group
In accordance with section 409 of the Companies Act 2006 and Schedule 4 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, a full list of related undertakings, registered office address and the percentage of share class owned as at 27 February 2021 are disclosed below. Changes to the list of related undertakings since the year-end date are detailed in the footnotes below. All undertakings are indirectly owned by Tesco PLC unless otherwise stated.
Subsidiary undertakings incorporated in the United Kingdom
% held % held Name of Registered Class of by Name of Registered Class of by undertaking address share held Group undertaking address share held Group Acklam Management Limited GBP1.00 Company Limited 1 by Guarantee - Linnco Limited 8 Ordinary 100 Alfred Preedy & GBP1.00 Londis (Holdings) GBP50.00 Sons Limited 2 Deferred 100 Limited 8 Ordinary 100 Londis Pension GBP1.00 Trustees GBP1.00 Ordinary 100 Limited 8 Ordinary 100 Armitage Finance GBP0.90 Makro Holding GBP1.00 Unlimited 1 Ordinary 100 Limited 8 Ordinary 100 Bath Upper Bristol Road Management Limited Makro Properties GBP1.00 Company Limited 1 by Guarantee - Limited 8 Ordinary 100 Makro Self Berry Lane Service GBP1.00 Management Limited Wholesalers Ordinary Company Limited 1 by Guarantee - Limited 8 A 100 GBP1.00 GBP1.00 Ordinary BF Limited 8 Ordinary 100 B 100 Bishop's Group GBP0.01 Maldon Finance GBP1.00 Limited 8 Ordinary 100 Limited 1 Ordinary 100 Booker Cash & Carry GBP1.00 US$1.00 Limited 8 Ordinary 100 A Preference 100 Booker Direct GBP0.01 US$0.50 Limited 8 Ordinary 100 B Preference 100 Booker Group GBP0.00000000055625 US$0.25 Limited 8 Ordinary 100 C Preference 100 Munster Road GBP1.00 Management Limited Booker Limited 8 Ordinary 100 Company Limited 1 by Guarantee - Booker Retail Partners GBP1.00 Murdoch Norton GBP0.05 (GB) Limited 8 Ordinary 100 Limited 8 Ordinary 100 Oakwood Booker Retail GBP0.10 Distribution GBP1.00 Limited 8 Ordinary 100 Limited 1 Ordinary 100 Booker Pension One Stop Trustees Limited Community GBP0.00001200004 Limited 8 by Guarantee 100 Stores Limited 2 Ordinary 100 GBP0.01 One Stop Booker Wholesale Ordinary Convenience GBP1.00 Holdings Limited 8 A1 100 Stores Limited 2 Ordinary 100 Booker Unapproved Scheme Trustees Limited One Stop Stores GBP1.00 Ltd 8 by Guarantee - Limited (a) 2 Ordinary 100 Bourne End Residential Management One Stop Stores Company Limited Trustee Services GBP1.00 Limited 1 by Guarantee - Limited 2 Ordinary 100 Broughton Retail Orpington Park Nominee 1 GBP1.00 (Station GBP1.00 Limited 1 Ordinary 100 Road) Limited 1 Ordinary 100 Oxford Fox and Hounds Broughton Retail Management Park Nominee 2 GBP1.00 Company Limited Limited 1 Ordinary 100 Limited 1 by Guarantee - Broughton Retail Park Nominee 3 GBP1.00 Paper Chain (East GBP1.00 Limited 1 Ordinary 100 Anglia) Limited 2 Deferred 100 Broughton Retail Park Nominee 4 GBP1.00 US$0.001 Limited 1 Ordinary 100 Ordinary 100 Budgen Holdings GBP1.00 GBP1.00 Limited 8 Ordinary 100 PTLL Limited 1 Ordinary 100 Budgens Pension Trustees No.2 GBP1.00 Ritter-Courivaud GBP0.10 Limited 8 Ordinary 100 Limited 8 Ordinary 100 Budgens Property Seacroft Green Investments GBP1.00 Nominee GBP1.00 Limited 8 Ordinary 100 1 Limited 1 Ordinary 100 Seacroft Green Budgens Stores GBP1.00 Nominee GBP1.00 Limited 8 Ordinary 100 2 Limited 1 Ordinary 100 Spen Hill Buttoncable GBP1.00 Developments GBP1.00 Limited 1 Ordinary 100 Limited 1 Ordinary 100 GBP1.00 Cumulative Spen Hill Buttoncase Redeemable Management GBP1.00 Limited 1 Preference 100 Limited (b) 1 Ordinary 100 Spen Hill GBP1.00 Properties GBP1.00 Ordinary 100 (Holdings) plc 1 Ordinary 100 Canterbury Road Spen Hill Management Limited Regeneration GBP1.00 Limited 1 by Guarantee - Limited 1 Ordinary 100 Cardiff Cathays Terrace Spen Hill Management Limited Residential GBP1.00 Company Limited 1 by Guarantee - No 1 Limited 1 Ordinary 100 Spen Hill GBP1.00 Residential GBP1.00 Comar Limited 1 Ordinary 100 No 2 Limited 1 Ordinary 100 GBP1.00 Cumulative Convertible Station House Day And Nite Participating Welling Stores Preferred Management Limited Limited 2 Ordinary 100 Limited 1 by Guarantee - GBP1.00 Cumulative Redeemable Statusfloat GBP1.00 Preference 100 Limited 1 Ordinary 100 GBP1.00 T & S Stores GBP0.05 Ordinary 100 Limited 2 Ordinary 100 Dillons GBP0.25
Newsagents Non-Voting Tapesilver GBP1.00 Limited* 2 Ordinary 100 Limited 1 Ordinary 100 dunnhumby International GBP1.00 Teesport (GP) GBP1.00 Limited 4 Ordinary 100 Limited 1 Ordinary 100 GBP3.59 Tesco (Overseas) GBP1.00 dunnhumby Limited 4 Ordinary 100 Limited 1 Ordinary 100 dunnhumby Overseas GBP1.00 Tesco Aqua (3LP) GBP1.00 Limited 4 Ordinary 100 Limited 1 Ordinary 100 dunnhumby Tesco Aqua Trustees GBP1.00 (FinCo2) GBP1.00 Limited 4 Ordinary 100 Limited 1 Ordinary 100 Giant Bidco GBP1.00 Tesco Aqua (GP) GBP1.00 Limited 8 Ordinary 100 Limited 1 A Ordinary 100 Giant Booker GBP0.25 GBP1.00 Limited 8 Ordinary 100 B Ordinary 100 Tesco Aqua Giant Midco GBP1.00 (Nominee GBP1.00 Limited 8 Ordinary 100 1) Limited 1 Ordinary 100 Highams Green Tesco Aqua Management Limited (Nominee GBP1.00 Company Limited 1 by Guarantee - 2) Limited 1 Ordinary 100 Tesco Aqua GBP1.00 (Nominee GBP1.00 IRTH (15) Limited 8 Ordinary 100 Holdco) Limited 1 Ordinary 100 Tesco Atrato US$0.000000052383172 (1LP) GBP1.00 IRTH (19) Limited 8 Ordinary 100 Limited 1 Ordinary 100 GBP1.00 A Ordinary Launchgrain GBP1.00 Tesco Atrato (GP) GBP1.00 Limited 1 Ordinary 100 Limited 1 B Ordinary 100 Tesco Atrato (Nominee GBP1.00 1) Limited 1 Ordinary 100 Tesco Atrato (Nominee GBP1.00 2) Limited 1 Ordinary 100 Tesco Atrato (Nominee GBP1.00 Holdco) Limited 1 Ordinary 100
Related undertakings of the Tesco Group continued
Subsidiary undertakings incorporated in the United Kingdom continued
% held % held Registered Class of by Registered Class of by Name of undertaking address share held Group Name of undertaking address share held Group Tesco Atrato Depot GBP1.00 Tesco Property Finance GBP1.00 Propco Limited 1 Ordinary 100 1 PLC 1 Ordinary 100 Tesco Blue (3LP) GBP1.00 GBP0.25 Limited 1 Ordinary 100 Ordinary 100 Tesco Blue (GP) GBP1.00 Tesco Property Holdings GBP1.00 Limited 1 A Ordinary 100 (No.2) Limited 1 Ordinary 100 GBP1.00 Tesco Property Holdings GBP1.00 B Ordinary 100 Limited 1 Ordinary 100 Tesco Blue (Nominee GBP1.00 Tesco Property Nominees GBP1.00 1) Limited 1 Ordinary 100 (No.5) Limited 1 Ordinary 100 Tesco Blue (Nominee GBP1.00 Tesco Property Nominees GBP1.00 2) Limited 1 Ordinary 100 (No.6) Limited 1 Ordinary 100 Tesco Blue (Nominee GBP1.00 Tesco Property Partner GBP1.00 Holdco) Limited 1 Ordinary 100 (GP) Limited 1 A Ordinary 100 Tesco Brislington GBP1.00 GBP1.00 Limited 1 Ordinary 100 1 B Ordinary 100 Tesco Corporate Treasury Services GBP1.00 Tesco Property Partner GBP1.00 PLC 1 Ordinary 100 (GP No.2) Limited A Ordinary 100 Tesco Depot Propco GBP1.00 GBP1.00 Limited 1 Ordinary 100 B Ordinary 100 Tesco Distribution GBP1.00 Tesco Property Partner GBP1.00 Holdings Limited 1 Ordinary 100 (No.1) Limited 1 Ordinary 100 Tesco Distribution GBP1.00 Tesco Property Partner GBP1.00 Limited 1 Ordinary 100 (No.2) Limited 1 Ordinary 100 Tesco Dorney (1LP) GBP1.00 Tesco Red (3LP) GBP1.00 Limited 1 Ordinary 100 Limited 1 Ordinary 100 Tesco Employees' GBP1.00 Share Scheme Trustees GBP1.00 Ordinary Limited (c) 1 Ordinary 100 Tesco Red (GP) Limited 1 A 100 GBP1.00 Tesco Family Dining GBP1.00 Ordinary Limited 1 Ordinary 100 B 100 Tesco Food Sourcing GBP1.00 Tesco Red (Nominee GBP1.00 Limited 1 Ordinary 100 1) Limited 1 Ordinary 100 GBP1.00 Tesco Red (Nominee GBP1.00 Tesco Freetime Limited 1 Ordinary 100 2) Limited 1 Ordinary 100 Tesco Fuchsia (3LP) GBP1.00 Tesco Red (Nominee GBP1.00 Limited 1 Ordinary 100 Holdco) Limited 1 Ordinary 100 Tesco Gateshead GBP1.00 Tesco Sarum (1LP) GBP1.00 Property Limited 1 Ordinary 100 Limited 1 Ordinary 100 GBP0.10 GBP1.00 Tesco Holdings Limited 1 Ordinary 100 Tesco Seacroft Limited 1 Ordinary 100 GBP1.00 Tesco Secretaries GBP1.00 Preference 100 Limited 1 Ordinary 100 Tesco International GBP1.00 GBP1.00 Services Limited 1 Ordinary 100 Tesco Services Limited 1 Ordinary 100 Tesco Lagoon GP GBP1.00 GBP1.00 Limited 5 Ordinary 100 Tesco Stores Limited 1 A Preference 100 Tesco Maintenance GBP1.00 GBP1.00 Limited 1 Ordinary 100 B Preference 100 Tesco Mobile Communications GBP1.00 GBP1.00
Limited 1 Ordinary 100 Ordinary 100 Tesco Mobile Services GBP1.00 Tesco TLB Finance GBP1.00 Limited 1 Ordinary 100 Limited 1 Ordinary 100 Tesco Navona (1LP) GBP1.00 Tesco TLB Properties GBP1.00 Limited 1 Ordinary 100 Limited 1 A Ordinary 100 GBP1.00 Tesco Navona (GP) Ordinary GBP1.00 Limited 1 A 100 B Ordinary 100 GBP1.00 Ordinary The Big Food Group GBP0.10 B 100 Limited 8 Ordinary 100 Tesco Navona (Nominee GBP1.00 The Teesport Limited Limited 1) Limited 1 Ordinary 100 Partnership 1 Partnership 100 Tesco Navona (Nominee GBP1.00 The Tesco Aqua Limited Limited 2) Limited 1 Ordinary 100 Partnership 1 Partnership 100 Tesco Navona (Nominee GBP1.00 The Tesco Atrato Limited Holdco) Limited 1 Ordinary 100 Limited Partnership 1 Partnership 100 Tesco Navona PL GBP1.00 The Tesco Blue Limited Limited Propco Limited 1 Ordinary 100 Partnership 1 Partnership 100 Tesco Overseas Investments GBP1.00 The Tesco Navona Limited Limited 1 Ordinary 100 Limited Partnership 1 Partnership 100 Tesco Passaic (1LP) GBP1.00 The Tesco Passaic Limited Limited 1 Ordinary 100 Limited Partnership 1 Partnership 100 GBP1.00 Tesco Passaic (GP) Ordinary The Tesco Property Limited Limited 1 A 100 Limited Partnership 1 Partnership 100 GBP1.00 The Tesco Property Ordinary (No.2) Limited Limited B 100 Partnership 17 Partnership 100 Tesco Passaic (Nominee GBP1.00 The Tesco Red Limited Limited 1) Limited 1 Ordinary 100 Partnership 1 Partnership 100 Tesco Passaic (Nominee GBP1.00 TPI Fund Managers GBP1.00 2) Limited 1 Ordinary 100 Limited 1 Ordinary 100 Tesco Passaic (Nominee GBP1.00 TPT Holdco No.1 GBP1.00 Holdco) Limited 1 Ordinary 100 Limited 1 Ordinary 100 Tesco Passaic PL GBP1.00 Weymouth Avenue GBP1.00 Propco Limited 1 Ordinary 100 (Dorchester) Limited 1 Ordinary 100 GBP0.01 Tesco PEG Limited 1 Ordinary 100 GBP1.00 Tesco PENL Limited 1 Ordinary 100 Tesco Pension Investment GBP1.00 Limited(d) 1 Ordinary 100 Tesco Pension Trustees GBP1.00 Limited 1 Ordinary 100 Tesco Personal Finance GBP0.10 Group PLC 6 A Ordinary 100 GBP0.10 B Ordinary 100 GBP0.10 C Ordinary 100 Tesco Personal Finance GBP0.10 PLC 6 Ordinary 100 Tesco Property (Nominees) GBP1.00 (No.1) Limited 11 Ordinary 100 Tesco Property (Nominees) GBP1.00 (No.2) Limited 11 Ordinary 100 Tesco Property (Nominees) GBP1.00 Limited 11 Ordinary 100 Tesco Property Finance GBP1.00 1 Holdco Limited 1 Ordinary 100
Related undertakings of the Tesco Group continued
International subsidiary undertakings
% held % held Registered Class of by Registered Class of by Name of undertaking address share held Group Name of undertaking address share held Group Agate Jewel sp. PLN 50 Let any Development CZK 100,000 z.o.o.(e) 75 Ordinary 100 land 2 s.r.o. 16 Ordinary 100 Arena (Jersey) Management GBP1.00 Monread Developments EUR0.001 Limited 33 Ordinary 100 Limited 24 Ordinary 100 Amethyst Jewel sp. PLN 50 Nabola Development EUR1.25 z o.o. 75 Ordinary 100 Limited 24 A Ordinary 100 Cheshunt Holdings GBP1.00 GBP1.25 Guernsey Limited 27 Ordinary 100 B Ordinary 100 EUR1.25 PLN 50 Chirac Limited 24 Ordinary 100 Onyx Jewel sp. Z.o.o.(e) 75 Ordinary 100 Cirrus Finance (2009) GBP1,000 PLN 50 Limited 24 A Ordinary 100 Opal Jewel sp. Z.o.o. 75 Ordinary 100 EUR1.00 Orpingford Unlimited EUR1.00 Ordinary 100 Company 24 Ordinary 100 Clondalkin Properties EUR1.25 GBP1.00 Limited 24 Ordinary 100 Parijude Limited 45 Ordinary 100 Commercial Investments EUR1.25 Pharaway Properties EUR1.00 Limited 24 Ordinary 100 Limited 24 Ordinary 100 Coral Jewel sp. PLN 50 Pearl Jewel sp. PLN 50 z.o.o.(e) 75 Ordinary 100 z o.o. 75 Ordinary 100 CZK 100,000 R.J.D. Holdings EUR1.269738 Crest Ostrava a.s 16 Ordinary 100 Unlimited Company 24 Ordinary 100 Diamond Jewel sp. PLN 50 PLN 50 z o.o. 75 Ordinary 100 Ruby Jewel sp. z.o.o.(e) 24 Ordinary 100 dunnhumby (Korea) KRW 5,000 Sapphire Jewel sp. PLN 50 Limited 66 Ordinary 100 z.o.o.(e) 75 Ordinary 100 dunnhumby (Malaysia) RM 1.00 Shopping Mall Chrudim CZK 100,000 Sdn Bhd 84 Ordinary 100 s.r.o.(i) 7 Ordinary 100 dunnhumby THB (Thailand) 1,000,000 Shopping Mall Eden CZK 100,000 Limited 73 Ordinary 100 s.r.o.(i) 7 Ordinary 100 dunnhumby Advertising EUR130,000 (Shanghai) Co., Registered Shopping Mall Karlovy CZK 100,000 Ltd 23 Capital 100 Vary s.r.o(i) 7 Ordinary 100 dunnhumby Australia AUD 100 Shopping Mall Opava CZK 100,000 PTY Limited 65 Ordinary 100 s.r.o.(i) 7 Ordinary 100 dunnhumby Brasil BRL$1.00 Shopping Mall Ostrava CZK 100,000 Consultora Ltda 77 Ordinary 100 s.r.o. (i) 7 Ordinary 100 Sociomantic Labs
dunnhumby Canada CA$1.00 Internet Hizmetleri TRY 25.00 Limited 59 Ordinary 100 Limited ireketi 51 Ordinary 100 CLP dunnhumby Chile 500,000 Tesco (Polska) Sp. PLN 500.00 SpA 48 Ordinary 100 z o.o.(g) 42 Ordinary 100 Tesco Akadémia Képzési és Fejlesztési Korátolt Felel HUF 1.00 dunnhumby Colombia COP 2,000 sségű Business S.A.S. 74 Type A 100 Társaság 32 Share 100 COP 41.00 Tesco Bengaluru INR 10.00 Type B 100 Private Limited 41 Ordinary 100 COP 1.00 Tesco Capital No. GBP0.50 Type C 100 1 Limited 28 A Ordinary 100 dunnhumby Computer Information Technology and Consultancy TL 25.00 GBP0.50 Services LLC 18 Ordinary 100 B Ordinary 100 dunnhumby Consulting Services India Private INR 10.00 GBP0.01 Limited 60 Ordinary 100 Preference - Guaranteed CZK Cumulative dunnhumby Czech 200,000 Fixed Rate s.r.o. 16 Ordinary 100 Preference 100 GBP0.01 dunnhumby Denmark DKK 1.00 Preferred lvS 57 Ordinary 100 Ordinary 100 100 dunnhumby Finland Kovellinum GBP1.00 Oy 30 Oy 100 Ordinary 100 dunnhumby France EUR2.00 Tesco Chile Sourcing CLP 1.00 SAS 61 Ordinary 100 Limitada 22 Ordinary 100 dunnhumby Germany EUR1.00 US$1.00 GmbH 14 Ordinary 100 Ordinary 100 Registered capital dunnhumby Hungary HUF Tesco Digital Ventures SGD 1.00 Kft 32 3,000,000 100 Pte Ltd 49 Ordinary 100 No par Tesco Dystrybucja PLN 50.00 dunnhumby Inc. 35 value - Sp. z o.o.(g) 42 Ordinary 100 dunnhumby Information Technology Consulting Registered CZK (Shanghai) Company capital Tesco Franchise 2,000,000 Limited 62 US$140,000 100 Stores ČR s.r.o. 16 Ordinary 100 dunnhumby Ireland EUR1.00 Tesco Franchise EUR1.00 Limited 67 Ordinary 100 Stores SR s.r.o. 68 Ordinary 100 dunnhumby IT Services Tesco-Global Stores India Private INR 10.00 Privately Held Company HUF 10.00 Limited 36 Ordinary 100 Limited 32 Common 100 dunnhumby Italia EUR1.00 EUR1.00 Srl. 37 Ordinary 100 Tesco Holdings B.V. 40 Ordinary 100 dunnhumby Japan JPY 10,000 Tesco International EUR1.00 K.K 38 Ordinary 100 Clothing Brand s.r.o. 58 Ordinary 100 MXN 2,970 dunnhumby Mexico Ordinary Tesco International EUR1.00 S. de R.L. de C.V. 69 A 100 Franchising s.r.o. 58 Ordinary 100 MXN 30.00 Ordinary Tesco International HKD 10.00 . B 100 Sourcing Limited 20 Ordinary 100 dunnhumby Netherlands EUR1.00 Tesco Ireland Holdings EUR1.25 B.V. 70 Ordinary 100 Limited 24 Ordinary 100 dunnhumby New NZD 100.00 EUR1.25 Zealand 64 Ordinary 100 Tesco Ireland Limited 24 Ordinary 100 dunnhumby Poland PLN 50,000 Tesco Ireland Pension EUR1.25 Sp. z o.o. 42 Ordinary 100 Trustees Limited 24 Ordinary 100 Tesco Joint Buying dunnhumby Russia RUB 1.00 Service (Shanghai) US$1.00 LLC 79 Ordinary 100 Co., Limited 76 Ordinary 100 dunnhumby Singapore SGD 1.00 Tesco Mobile Ireland EUR1.00 Pte Ltd 19 Ordinary 100 Limited 24 Ordinary 100 EUR100.00 Tesco Property (No. GBP1.00 dunnhumby SARL 61 Ordinary 100 1) Limited 28 Ordinary 100 dunnhumby Serviços de Promoção R$1.00 Tesco Sourcing India INR 10.00 Digital Ltda 77 Ordinary 100 Private Limited 80 Ordinary 100 dunnhumby Slovakia No shares Tesco Stores ČR CZK 250 s.r.o. 58 in issue - a.s. 16 Ordinary 100 dunnhumby Sp. z PLN 50.00 Tesco Stores SR, EUR33,193.92 o.o. 47 Ordinary 100 a.s. 58 Ordinary 100 Tesco Technology dunnhumby Spain EUR1.00 and Services Europe PLN 50 S.L 50 Ordinary 100 SP . Z.O.O. 75 Ordinary 100 No par dunnhumby South value Tesco Trustee Company EUR1.25 Africa (Pty) Ltd 43 Ordinary 100 of Ireland Limited 24 Ordinary 100 TESCO Üzleti és Technológiai Szolgáltatások Zârtköruen dunnhumby Ventures Múködó LLC 44 - - Részvénytársaság 25 HUF 1,000.00 100 Edson Investments EUR2.00 EUR1.00 Limited 24 Ordinary 100 Thundridge Unlimited 24 Ordinary 100 Edson Properties EUR1.00 Topaz Jewel sp. PLN 50 Limited 24 Ordinary 100 z o.o. 75 Ordinary 100 ELH Insurance GBP1.00 Victoria BB Sp. PLN 800.00
Limited 71 Ordinary 100 z o.o. 42 Ordinary 100 Emerald Jewel sp. PLN 50 Wanze Properties EUR1.00 z o.o. 75 Ordinary 100 (Dundalk) Limited 24 Ordinary 100 GBP1.00 EUR0.0000005 Epicier Limited 46 Ordinary 100 WSC Properties Limited 24 Ordinary 100 Genesis sp. z PLN 500.00 o.o.(g) 42 Ordinary 100 Jasper Sp. z PLN 100.00 o.o.(g) 42 Ordinary 100
Related undertakings of the Tesco Group continued
Subsidiary undertakings in liquidation
The following subsidiary undertakings were incorporated in the
United Kingdom
% held Name of Registered Class of by Name of Registered Class of % held undertaking address share held Group undertaking address share held by Group Tesco Dorney Adminstore GBP0.01 (Nominee GBP1.00 Limited 9 A Ordinary 100 Holdco) Limited 1 Ordinary 100 GBP0.01 Tesco Jade (GP) GBP1.00 B Ordinary 100 Limited 29 A Ordinary 30 GBP0.01 GBP1.00 C Ordinary 100 B Ordinary 30 Cheshunt Finance GBP0.000000001 Tesco Mobile GBP0.10 Unlimited 9 Ordinary 100 Limited* 1 A Ordinary 100 Limited Cheshunt Overseas Liability GBP0.90 LLP 3 Partnership 100 B Ordinary 100 Tesco Property dunnhumby (Sparta Advertising GBP0.001 Nominees) GBP1.00 Limited 9 Ordinary 100 Limited 1 Ordinary 100 Tesco Property dunnhumby Holding GBP1.00 (Nominees) GBP1.00 Limited 4 Ordinary 100 (No.3) Limited 1 Ordinary 100 Tesco Property Europa Foods GBP0.000000176 (Nominees) GBP1.00 Limited 9 Ordinary 100 (No.4) Limited 1 Ordinary 100 Tesco Property Partner Fresh Food GBP1.00 (GP No.2) GBP1.00 Trader Limited 9 Ordinary 50 Limited 1 A Ordinary 100 GBP1.00 Tesco Sarum (GP) GBP1.00 Preference 100 Limited* 1 A Ordinary 10 J.Smylie & Tesco Sarum Sons (IOM) GBP1.00 (Nominee GBP1.00 Limited 72 Ordinary 100 1) Limited 1 Ordinary 100 Tesco Sarum KSS Retail (Nominee GBP1.00 Limited 9 GBP0.000000851 100 2) Limited 1 Ordinary 100 Tesco Sarum (Nominee GBP1.00 M & W Limited 9 GBP0.0000000582261 100 Holdco) Limited 1 Ordinary 100 Tesco Motorcause GBP1.00 Underwriting GBP1.00 Limited 9 Ordinary 100 Limited 31 Ordinary 49.9 Reefknot The Tesco Coral Technology GBP1.00 Limited Limited Limited 9 Ordinary 100 Partnership 1 Partnership 50 Stewarts The Tesco Dorney Supermarkets GBP1.00 Limited Limited Limited 9 Ordinary 100 Partnership 1 Partnership 50 The Tesco Property Tesco Aqua GBP1.00 (No.2) Limited Limited (FinCo1) Limited 9 Ordinary 100 Partnership 17 Partnership 50 The Tesco Sarum Tesco Blue GBP1.00 Limited Limited (FinCo2) Limited 9 Ordinary 100 Partnership 1 Partnership 50 GBP0.01 Tesco FFC Limited 9 Ordinary 100 Tesco International Internet Retailing Limited 9 GBP0.0000013543 100 The following associated undertakings Tesco Overseas GBP0.00000025 were incorporated outside of ULC 9 A Ordinary 100 the United Kingdom GBP0.00000025 B Ordinary 100 GBP0.00000025 C Ordinary 100 GBP0.00000025 100 Name of Registered Class of % held D Ordinary undertaking address share held by Group GBP0.00000025 E Ordinary 100 Arena Unit Trust 33 - 50 GBP0.00000025 Booker India INR 1.00 F Ordinary 100 Limited 54 Ordinary 49 Booker Satnam GBP0.00000025 Wholesale INR 1.00 G Ordinary 100 Limited 54 Ordinary 49 China Wisdom GBP0.00000025 dunnhumby RMB 264,000 H Ordinary 100 Limited 53 Ordinary 50 China Wisdom dunnhumby RMB 264,000,000 GBP0.00000025 (Shanghai) Registered J Ordinary 100 Limited 63 Capital 50 dunnhumby Mitsui Bussan Customer Science GBP0.00000025 Co., JPY 1,000 K Ordinary 100 Ltd 55 Ordinary 50 GBP0.00000025 dunnhumby Norge NOK 1,000 L Ordinary 100 A.S. 56 Ordinary 50 Merrion Shopping GBP0.00000025 Centre EUR0.012697 M Ordinary 100 Limited 24 Ordinary 51.9 Tesco Mobile GBP0.00000025 ČR CZK 100,000 N Ordinary 100 s.r.o. 16 Ordinary 50 Tesco Mobile GBP0.00000025 Slovakia EUR1.00 O Ordinary 100 s.r.o. 81 Ordinary 50 Trent
GBP0.00000025 Hypermarket INR 10.00 P Ordinary 100 Private Limited 26 Equity 50 The following subsidiary undertakings were incorporated outside of the United Kingdom Consolidated structured entities % held Name of Registered Nature of business Name of Registered Class of by undertaking address undertaking address share held Group Delamare Cards Avantil Services GBP1.00 Holdco Securitisation Company Limited 39 Ordinary 100 Limited 47 entity Delamare Cards Booker Cyprus EUR1.00 MTN Securitisation Limited 21 Ordinary 100 Issuer plc 47 entity China Property Delamare Cards Holdings (HK) HKD 1.00 Receivables Securitisation Limited 20 Ordinary 100 Trustee Limited 47 entity Delamare Cards EUR1.00 Funding Securitisation Saneyia Limited 21 Ordinary 100 1 Limited 47 entity Sociomantic Delamare Cards Labs Private INR 10.00 Funding Securitisation Limited 78 Ordinary 100 2 Limited 47 entity Tesco Global Employment THB 100.00 Delamare Finance Securitisation Company Limited 34 Ordinary 100 PLC 11 entity GBP0.01 Floating Rate Redeemable Preference 100 Delamare Group Tesco Capital GBP1.00 Holdings Securitisation No.2 Limited 9 Ordinary 100 Limited 11 entity Tesco Vin Plus EUR1.60 S.A. 52 Ordinary 100 Associated undertakings * Undertaking where other share classes The following associated undertakings are held by a third party were incorporated in the United Interest held directly by Tesco PLC Kingdom (a) 95% held by Tesco PLC (b) 66.6% held by Tesco PLC (c) 50% held by Tesco PLC (d) Shares held by Tesco Pension Trustees Limited (TPTL), the corporate trustee of the Tesco PLC Pension Scheme (the Scheme). On behalf of the Scheme, TPTL holds a 50% shareholding in three property joint ventures with Tesco, and is the sole shareholder of Tesco Pension (Jade) Limited and Tesco Pension Investment Limited (e) Placed into liquidation on 01/03/2021 (f) Interest sold on 02/03/2021 (g) Sold on 16/03/2021 (h) Dissolved on 21/03/2021 (i) Incorporated on 06/04/2021 % held Name of Registered Class of by undertaking address share held Group Broadfields Management GBP0.10 Limited 12 Ordinary 35.3 Clarepharm GBP0.10 Limited(f) 13 Ordinary 26.5 Shire Park GBP1.00 Limited 15 Ordinary 48.57 Tesco Coral GBP1.00 (GP) Limited* 1 A Ordinary 100 Tesco Coral GBP1.00 (Nominee) Limited 1 Ordinary 100 Tesco Dorney GBP1.00 (GP) Limited* 1 A Ordinary 100 Tesco Dorney (Nominee 1) GBP1.00 Limited 1 Ordinary 100 Tesco Dorney (Nominee 2) GBP1.00 Limited 1 Ordinary 100
Registered office addresses
1. Tesco House, Shire Park, Kestrel Way, Welwyn Garden City, AL7 1GA, United Kingdom 2. Apex Road, Brownhills, Walsall, West Midlands, WS8 7HU, United Kingdom 3. KPMG LLP, 15 Canada Square, London, E14 5GL, United Kingdom 4. 184 Shepherds Bush Road, London, W6 7NL, United Kingdom
5. C/O Morton Fraser LLP, 5th Floor, Quartermile Two, 2 Lister Square, Edinburgh, Scotland, EH3 9GL, United Kingdom
6. 2 South Gyle Crescent, Edinburgh, EH12 9FQ, United Kingdom 7. Vršovická 1527/68b, Vršovice, 100 00 Prague 10, Czech Republic
8. Equity House, Irthlingborough Road, Wellingborough, Northamptonshire, NN8 1LT, United Kingdom
9. Ernst & Young LLP, 1 More London Place, London, SE1 2AF, United Kingdom
10. Suite 13.03, 13th Floor, Menara Tan & Tan, 207 Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia
11. 1 Bartholomew Lane, London, England, EC2N 2AX 12. 2 Paris Parklands, Railton Road, Guildford, Surrey, GU2 9JX 13. Thompson Jenner, 28 Alexandra Terrace, Exmouth, Devon, EX8 1BD 14. Ritterstraße 6, 10969 Berlin, Germany 15. Riverside House, 3 Place Farm, Wheathampstead, St. Albans, England, AL4 8SB 16. 1527/68b, Vrsovicka, Praha 10, City of Prague, 100 00, Czech Republic 17. PO Box 87 22 Grenville Street, St Helier, Jersey 18. Yeni Havaalani Caddesi, No. 40 Cigli, Izmir, 35610 Turkey 19. 50 Raffles Place, #19-00 Singapore Land Tower, Singapore 048623 20. 31st Floor AIA Kowloon Tower Landmark East, 100 How Ming Street, Kowloon, Hong Kong 21. 5 Esperidon Street, 4th floor, 2001 Strovolos, Nicosia, Cyprus
22. Avenida Santa María 5888, Piso 2 Zona A, Oficina 4, Vitacura, Santiago, 7660268, Chile
23. Eco City Centro, 901-12 office, 9 / F 1788 West Nanjing Road, Jingan District, Shanghai, China
24. Gresham House, Marine Road, Dun Laoghaire, Co. Dublin, Ireland 25. ll38, Budapest, Váci út, 187, Hungary 26. Taj Building, 2nd Floor, 210, Dr D.N. Road, Fort, Mumbai, 400001, India 27. PO Box 25, Regency Court, Glategny Esplanade, St. Peter Port, Guernsey, GY1 3AP 28. Level 1, IFC1 Esplanade, St Helier, Jersey, JE2 3BX 29. 20 Churchill Place, Canary Wharf, London, E14 5HJ 30. c/o RSM Finland Oy, Ratamestarinkatu 7 B, 00520, Helsinki, Finland 31. Ageas House Hampshire Corporate Park, Templars Way, Eastleigh, Hampshire, SO53 3YA 32. H-2040 Budaörs, Kinizsi, ÚT 1-3, Hungary 33. 47 Esplanade, St Helier, Jersey, JE1 0BD 34. 629/1 Nawamintr Road, Nuanchan, Buengkoom, Bangkok, 10230, Thailand
35. c/o The Corporation Trust Company, 1209 Orange Street, Corporation Trust Center, Wilmington, DE 19801, USA
36. S-22 Greater Kailash, Part 1, Lower Ground Floor, New Delhi 110048, India 37. Carrera 48 no. 32B sur - 139, Envigado, Italy 38. 9th Floor, Shiroyama Trust Tower, 3-1, Toranomon 4-chome, Minato-ku, Tokyo, Japan 39. 38/39 Fitzwilliam Square, Dublin 2, Ireland 40. Willemsparkweg 150 hs, 1071 HS, Amsterdam, The Netherlands, Netherlands 41. 81 & 82, EPIP Area, Whitefield, Bangalore, 560066, India 42. 56 Kapelenka St, 30-347, Krakow, Poland 43. 3rd Floor, 54 Melrose Boulevard, Melrose Arch, Gauteng, 2196, South Africa
44. c/o FBT Ohio, Inc.,3300 Great American Tower, 301 East Fourth Street, Cincinnati, OH 45202, USA
45. Windward 1, Regatta Office Park, PO Box 897, Grand Cayman KY1 - 1103, Cayman Islands 46. Beauport House, L'Avenue de la Commune, Jersey, JE3 7BY 47. 6th Floor, 125 London Wall, London, England EC2Y 5A 48. Av. El Golf 40, 7th floor, Las Condes, Santiago de Chile, Chile 49. 163 Tras Street, #03-01, Lian Huat Building, Singapore, 079024, Singapore 50. Paseo de General Martinez Campos, Campos n 9 1 izquierda, 28010 Madrid, Spain 51. Istiklal Caddesi Beyoglu Is Merkezi No: 187/5 Galatasaray, Istanbul, Turkey 52. Centre de Commerces et de, Loisirs, Cite Europe, 62231 Coquelles, France 53. Suite 1106-8, 11/F., Tai Yau Building, No 181 Johnston Road, Wanchai, Hong Kong
54. Unit 607, 6th floor, Trade Centre, Bandra Kurla Complex, Bandra East, Mumbai, 400051, Maharashtra, India
55. 1-2-3 Marunouchi, Chiyoda-ku, Tokyo, Japan 56. Rosenkrantzgate 16, Oslo, O160, Norway 57. c/o TMF Denmark A/S, Købmagergade 60, 1. tv., 1150 København K, Denmark 58. Cesta na Senec 2, Bratislava, 821 04, Slovakia 59. 1400-340 Albert St, Ottawa ON K1R 0A5, Canada
60. 4th Fl, Tower B, Paras Twin Towers, DLF Golf Course Road, Sector 54, Gurgaon, Haryana-HR, 122002, India
61. 48 rue Cambon, 75001, Paris, France
62. Room 1001, Enterprise Development Tower, No. 398, Jiangsu Road Changning District, Shanghai 200050, People's Republic of China
63. Room 501-4, No.398 Jiangsu Road, Shanghai, People's Republic of China 64. RSM New Zealand, Level 2, 60 Highbrook Drive, Auckland, 2013, New Zealand 65. Level 21, 55 Collins Street, Melbourne, VIC 3000, Australia 66. 10 Gukjegeumyung-ro, Yeongdeungpo-gu, Seoul, Korea (07326) 67. Floor 3, 2 Harbour Square, Crofton Road, Dun Laoghaire, Dublin, Ireland 68. Veterná 7310/40, 917 01 Trnava, The Slovak Republic, Slovakia
69. Av President Masarik No. 111, Piso 1, Colina Polance V Seccion Delegacion Miguel Hidalgo, C.P. 11560, Mexico
70. Regus Amsterdam Sloterdijk Teleport Towers, Kingsfordweg 151, 1043 GR Amsterdam 71. Dorey Court, Admiral Park, St. Peter Port, GY1 4AT, Guernsey 72. PO Box 237, Peregrine House, Peel Road, Douglas, Isle of Man, IM99 1SU
73. No. 319 Chamchuri Square Building, 16th Fl, Unit 01, Phayathi Road Pathumwan sub District, Bangkok 10330, Thailand
74. Calle 32 b sur #48-100, Envigado, Antioquia, Colombia 75. ul. Po czyńska 121/125, 01-377 Warsaw, Poland
76. Unit 01, 02, 06, 07, 08, 09, Floor 17, No. 610 Xujiahui Road, Huangpu District, Shanghai, People's Republic of China
77. Av.Brigadeiro Luis Antônio, 3530, 5deg Andar, 01402-001 São Paulo, Brazil
78. c/o Vaish Associates, 106, Peninsula Centre, Dr. S. S. Rao Road, Parel Mumbai - 400012, Maharashtra, India
79. 125047, Moscow, 1st Tverskaya-Yamskaya Street, 23, building 1, floor 5, premise V, room 5
80. 5th Floor, Unit 401, Tower B, The Millenia, No. 1&2 Murphy Road Ulsoor, Bangalore, 560 008, India
81. Einsteinova 24, Bratislava 851 01, Slovakia
Supplementary information (unaudited)
Total sales performance at actual rates (exc. VAT, exc. fuel) for continuing operations(a)
1Q 2Q 3Q 4Q 1H 2H FY 2020/21 2020/21 2020/21 2020/21 2020/21 2020/21 2020/21 UK & ROI 9.4% 7.8% 8.7% 9.4% 8.6% 9.1% 8.8% UK 9.1% 6.3% 7.2% 9.3% 7.7% 8.3% 8.0% ROI 23.0% 9.6% 15.3% 19.8% 16.3% 17.5% 16.9% Booker 6.1% 15.7% 15.1% 5.9% 11.0% 10.6% 10.5% Central Europe 0.8% (8.9)% (0.7)% 0.8% (4.3)% 0.1% (2.1)% Tesco Bank (26.5)% (35.9)% (28.5)% (33.6)% (31.4)% (31.0)% (31.2)% Group 7.9% 5.4% 7.2% 7.9% 6.6% 7.5% 7.1%
Total sales performance at constant rates (exc. VAT, exc. fuel) for continuing operations(a)
1Q 2Q 3Q 4Q 1H 2H FY 2020/21 2020/21 2020/21 2020/21 2020/21 2020/21 2020/21 UK & ROI 9.2% 7.8% 8.5% 9.1% 8.5% 8.8% 8.6% UK 9.1% 6.3% 7.2% 9.3% 7.7% 8.3% 8.0% ROI 19.7% 9.4% 11.7% 14.0% 14.5% 12.9% 13.7% Booker 6.1% 15.7% 15.1% 5.9% 11.0% 10.6% 10.5% Central Europe 3.3% (5.7)% 0.7% (0.5)% (1.5)% 0.1% (0.6)% Tesco Bank (26.5)% (35.9)% (28.5)% (33.6)% (31.4)% (31.0)% (31.2)% Group 8.0% 5.6% 7.1% 7.5% 6.8% 7.3% 7.0%
(a) In order to ensure the best comparability year-on-year, sales growth in 2H is reported as sales for 26 weeks ending 27 February 2021 against sales for 26 weeks ending 29 February 2020.
Like-for-like sales performance (exc. VAT, exc. fuel) for continuing operations
1Q 2Q 3Q 4Q 1H 2H FY 2020/21 2020/21 2020/21 2020/21 2020/21 2020/21 2020/21 UK & ROI 8.2% 6.2% 6.1% 6.9% 7.2% 6.5% 6.8% UK 8.7% 6.4% 6.7% 8.8% 7.6% 7.8% 7.7% ROI 20.5% 10.6% 11.8% 13.3% 15.5% 12.6% 14.0% Booker 0.6% 3.7% 0.1% (8.3)% 2.2% (4.0)% (0.8)% Central Europe 3.9% (5.3)% 0.9% (0.6)% (0.9)% 0.1% (0.4)% Tesco Bank n/a n/a n/a n/a n/a n/a n/a Group 7.9% 5.2% 5.7% 6.3% 6.5% 6.0% 6.3%
Country detail - Retail
Revenue (exc. VAT, inc. fuel) Average Closing Local currency exchange exchange (m) GBPm rate rate UK 43,750 43,750 1.0 1.0 ROI 2,998 2,684 1.1 1.2 Booker 6,736 6,736 1.0 1.0 Czech Republic 41,339 1,391 29.7 30.2 Hungary 545,409 1,376 396.4 417.9 Slovakia 1,357 1,215 1.1 1.2 UK sales area by size of store 27 February 2021 29 February 2020 No. of Million % of total No. of Million % of total Store size (sq. ft.) stores sq. ft. sq. ft. stores sq. ft. sq. ft. 0-3,000 2,534 5.5 14.2% 2,508 5.4 14.0% 3,001-20,000 282 3.0 7.8% 284 3.0 7.8% 20,001-40,000 285 8.2 21.2% 284 8.2 21.3% 40,001-60,000 182 8.8 22.8% 182 8.8 22.9% 60,001-80,000 120 8.4 21.8% 120 8.4 21.8% 80,001-100,000 45 3.7 9.6% 45 3.7 9.6% Over 100,000 8 1.0 2.6% 8 1.0 2.6% Total* 3,456 38.6 100.0% 3,431 38.5 100.0%
* Excludes Booker and franchise stores.
Supplementary information (unaudited) continued
Group space summary
Actual Group space - store numbers(a)
Net gain/ Repurposing/ 2019/20 Closures/ (reduction) 2020/21 extensions year end Openings disposals (b) year end (c) Large 796 1 (2) (1) 795 - Convenience 1,920 20 (2) 18 1,938 - Dotcom only 6 - - - 6 - Total Tesco 2,722 21 (4) 17 2,739 - One Stop (d) 697 - 8 705 - Booker 196 (2) (2) 194 - 8 - Jack's 12 - - - 12 - UK (d) 3,627 29 (6) 23 3,650 - ROI 150 1 - 1 151 1 UK & ROI (d) 3,777 30 (6) 24 3,801 1 Czech Republic (d) 186 1 (4) (3) 183 (1) Hungary 202 - (1) (1) 201 - Slovakia d) 150 3 - 3 153 (3) Central Europe (d) 538 4 (5) (1) 537 (4)
Group (d) 4,315 34 (11) 23 4,338 (3) UK (One Stop) 191 35 (19) 16 207 - Czech Republic 107 20 (4) 16 123 - Slovakia - 5 - 5 5 - Franchise stores 298 60 (23) 37 335 -
Actual Group space - '000 sq. ft.(a)
Repurposing/ Net gain/ 2020/21 2019/20 Closures/ extensions (reduction) year year end Openings disposals (c) (b) end Large 31,336 20 (17) - 3 31,339 Convenience 5,204 44 (4) - 40 5,244 Dotcom only 716 - - - - 716 Total Tesco 37,256 64 (21) - 43 37,299 One Stop (d)(e) 1,139 15 - (4) 11 1,150 Booker 8,376 - (92) - (92) 8,284 Jack's 119 - - - - 119 UK (d) 46,890 79 (113) (4) (38) 46,852 ROI 3,274 56 - 5 61 3,335 UK & ROI (d) 50,164 135 (113) 1 23 50,187 Czech Republic (d) 4,289 14 (19) (18) (23) 4,266 Hungary 6,000 - (3) - (3) 5,997 Slovakia (d) 3,180 16 - (45) (29) 3,151 Central Europe (d) 13,469 30 (22) (63) (55) 13,414 Group (d) 63,633 165 (135) (62) (32) 63,601 UK (One Stop) 237 44 (25) - 19 256 Czech Republic 101 19 (2) - 17 118 Slovakia - 5 - - 5 5 Franchise stores 338 68 (27) - 41 379 (a) Continuing operations.
(b) The net gain/(reduction) reflects the number of store openings less the number of store closures/disposals.
(c) Repurposing of retail selling space. (d) Excludes franchise stores. (e) Prior year restatement included within repurposing/extensions
Supplementary information (unaudited) continued
Group space forecast to 26 February 2022 - '000 sq. ft.(a)
2021/22 2020/21 Closures/ Repurposing/ Net gain/ year year end Openings disposals extensions (reduction) end Large 31,339 56 - - 56 31,395 Convenience 5,244 92 (7) - 85 5,329 Dotcom only 716 - - - - 716 Total Tesco 37,299 148 (7) - 141 37,440 One Stop (b) 1,150 - - - - 1,150 Booker 8,284 - - - - 8,284 Jack's 119 12 - - 12 131 UK (b) 46,852 160 (7) - 153 47,005 ROI 3,335 - - 29 29 3,364 UK & ROI (b) 50,187 160 (7) 29 182 50,369 Czech Republic (b) 4,266 86 - (41) 45 4,311 Hungary 5,997 - (15) (151) (166) 5,831 Slovakia 3,151 57 - (6) 51 3,202 Central Europe (b) 13,414 143 (15) (198) (70) 13,344 Group (b) 63,601 303 (22) (169) 112 63,713 UK (One Stop) 256 - - - - 256 Czech Republic 118 29 - - 29 147 Slovakia 5 16 - - 16 21 Franchise stores 379 45 - - 45 424 (a) Continuing operations. (b) Excludes franchise stores.
Tesco Bank income statement
2021 (a) 2020 (a) GBPm GBPm Revenue 542 733 Interest receivable and similar income Fees and commissions receivable 193 335 735 1,068 Direct costs Interest payable (83) (166) Fees and commissions payable (17) (25) (100) (191) Gross profit 635 877 Other expenses Staff costs (176) (164) Premises and equipment (75) (72) Other administrative expenses (142) (191) Depreciation and amortisation (57) (78) Impairment loss on financial assets (360) (179) Operating profit before exceptional items (175) 193 Exceptional items (b) (295) (119) Operating profit (470) 74 Net finance costs: movements on derivatives and hedge accounting (2) (11) Net finance costs: interest (7) 23 Share of profit/(loss) of joint venture 16 10 Profit for the year (463) 96
(a) These results are for the 12 months ended 27 February 2021 and the previous period represents the 12 months ended 29 February 2020.
(b) Exceptional items in 2021 comprise of a goodwill impairment charge of GBP(295)m (2020: PPI provision charge GBP(45)m, restructuring costs GBP(13)m, accelerated amortisation and costs related to the sale of the mortgage book and PCA GBP(61)m).
Glossary - Alternative performance measures
Introduction
In the reporting of financial information, the Directors have adopted various APMs.
These measures are not defined by International Financial Reporting Standards (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 users in understanding the Group's performance.
Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive-setting purposes.
Some of the Group's IFRS measures are translated at constant exchange rates. Constant exchange rates are the average actual periodic exchange rates for the previous financial period 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 period.
Changes to APMs
The Directors and management have redefined Free cash flow and Retail free cash flow to be from continuing operations. Redefining Free cash flow and Retail free cash flow to exclude the cash flows of the Group's discontinued operations ensures consistency with the Group's Retail operating cash flow APM, and is a more appropriate measure of the ongoing cash generation of the Group.
The Directors and management have added Retail sales as a new APM, which is defined as Group sales excluding Tesco Bank sales and sales made at petrol filling stations. This metric is used to demonstrate the underlying performance in the Group's core Retail businesses and removes the volatilities associated with the movement in fuel prices.
The Directors and management have added Diluted earnings per share from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments (adjusted for share consolidation) as a new APM. This is defined as profit after tax before exceptional items and amortisation of acquired intangibles from continuing operations, net pension finance costs and fair value remeasurements 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 share options and to reflect the full impact of the share consolidation as if it had taken place at the start of the previous financial year. This metric is used to demonstrate the underlying earnings per share of the Group's continuing operations, and removes any distortion from the sale of our businesses in Thailand and Malaysia as the earnings from discontinued operations are excluded, but the weighted average share base used in the statutory IAS 33 denominator does not yet reflect the full impact of the share consolidation and special dividend. To aid comparability, this new APM, which is presented on a basis other than in accordance with IAS 33 includes the full impact of the share consolidation as if it had taken place at the start of the previous financial year.
Closest equivalent Adjustments Definition IFRS measure to reconcile and purpose APM to IFRS measure Income Statement Revenue measures Group sales Revenue - Exclude sales - Excludes the impact of sales made made at petrol at petrol filling stations to demonstrate filling stations the Group's underlying performance in the core retail and financial services businesses by removing the volatilities associated with the movement in fuel prices. This is a key management incentive metric. Growth in sales No direct - Consistent - Growth in sales is a ratio that measures equivalent with accounting year-on-year movement in Group sales policy 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 - Consistent - Like-for-like is a measure of growth equivalent with accounting in Group online sales and sales from policy 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. Retail sales Revenue - Exclude Tesco - Group sales excluding Tesco Bank Bank sales sales to demonstrate the Group's underlying - Exclude sales performance in the core Retail businesses. made at petrol filling stations Profit measures Operating profit Operating - Exceptional - Operating profit before exceptional before exceptional profit* items items and amortisation of acquired items and amortisation - Amortisation intangibles is the headline measure of acquired intangibles of acquired of the Group's performance, and is intangibles based on operating profit from continuing operations before the impact of exceptional items and amortisation of intangible assets acquired in business combinations. Exceptional items relate to certain cost or incomes that derive from events or transactions that fall within the normal activities of the Group but which, individually or, if of similar type, in aggregate, are excluded by virtue of their size and nature in order to reflect management's view of the underlying performance of the Group. This is a key management incentive metric.
* Operating profit is presented on the Group income statement. It is not defined per IFRS, however, is a generally accepted profit measure.
Glossary - Alternative performance measures continued
Closest Adjustments equivalent to reconcile Definition APM IFRS measure to IFRS measure and purpose Profit measures continued Retail operating Operating - Tesco Bank - Retail operating profit is a profit profit* operating measure of the Group's operating profit profit from continuing operations - Retail exceptional from the Retail business excluding items Tesco Bank. It is based on Retail - Retail amortisation operating profit before exceptional of acquired items and amortisation of acquired intangibles intangibles. Operating margin No direct - Consistent - Operating margin is calculated equivalent with accounting as operating profit before exceptional policy items and amortisation of acquired intangibles divided by revenue. Progression in operating margin is an important indicator of the Group's operating efficiency. Retail earnings Operating - Exceptional - This measure is based on Retail before exceptional profit* items operating profit from continuing items, interest, - Depreciation operations. It excludes Retail tax, depreciation and amortisation exceptional items, depreciation and amortisation - Tesco Bank and amortisation and is used to (Retail EBITDA) earnings before derive the Total indebtedness exceptional ratio and Fixed charge cover APMs. items, interest, tax, depreciation and amortisation - Discontinued operations Profit before Profit - Exceptional - This measure excludes exceptional tax before before items items and amortisation of acquired exceptional tax - Amortisation intangibles, net finance costs items and amortisation of acquired of the defined benefit pension
of acquired intangibles deficit and fair value remeasurements intangibles, - Net pension of financial instruments. Net net pension finance costs pension finance costs are impacted finance costs - Fair value by corporate bond yields, which and fair value remeasurements can fluctuate significantly and remeasurements of financial are reset each year based on often of financial instruments volatile external market factors. instruments Fair value remeasurements are impacted by changes to credit risk and various market indices, which can fluctuate significantly. Also included in these items are fair value remeasurements of financial instruments resulting from liability management exercises. Total finance Finance - Exceptional - Total finance costs before exceptional costs before costs items items, net pension finance costs exceptional - Net pension and fair value remeasurements items, net finance costs of financial instruments is the pension finance - Fair value net finance costs adjusted for costs and fair remeasurements non-recurring one-off items, net value remeasurements of financial pension finance costs and fair of financial instruments value remeasurements of financial instruments instruments. Net pension finance costs are impacted by corporate bond yields, which can fluctuate significantly and are reset each year based on often volatile external market factors. Fair value remeasurements are impacted by changes to credit risk and various market indices, which can fluctuate significantly. Also included in these items are fair value remeasurements of financial instruments resulting from liability management exercises. Diluted earnings Diluted - Exceptional - This relates to profit after per share from earnings items tax before exceptional items and continuing per share - Amortisation amortisation of acquired intangibles operations of acquired from continuing operations, net before exceptional intangibles pension finance costs and fair items and amortisation - Discontinued value remeasurements attributable of acquired operations to owners of the parent divided intangibles, - Net pension by the weighted average number net pension finance costs of ordinary shares in issue during finance costs - Fair value the financial period adjusted and fair value remeasurements for the effects of potentially remeasurements of financial dilutive share options. of financial instruments - It excludes net pension finance instruments costs and fair value remeasurements of financial instruments. Net pension finance costs are impacted by corporate bond yields, which can fluctuate significantly and are reset each year based on often volatile external market factors. Fair value remeasurements are impacted by changes to credit risk and various market indices, which can fluctuate significantly. Also included in these items are fair value remeasurements of financial instruments resulting from liability management exercises. Diluted earnings Diluted - Exceptional - This relates to profit after per share from earnings items tax before exceptional items and continuing per share - Amortisation amortisation of acquired intangibles operations of acquired from continuing operations, net before exceptional intangibles pension finance costs and fair items and amortisation - Discontinued value remeasurements attributable of acquired operations to owners of the parent divided intangibles, - Net pension by the weighted average number net pension finance costs of ordinary shares in issue during finance costs - Fair value the financial period adjusted and fair value remeasurements for the effects of potentially remeasurements of financial dilutive share options and to of financial instruments reflect the full impact of the instruments - Weighted share consolidation as if it had (adjusted for average number taken place at the start of the share consolidation) of diluted previous financial year. This shares metric is used to demonstrate the underlying earnings per share of the Group's continuing operations, and removes any distortion from the sale of our businesses in Thailand and Malaysia as the earnings from discontinued operations are excluded, but the weighted average share base used in the statutory IAS 33 denominator does not yet reflect the full impact of the share consolidation and special dividend. To aid comparability, this new APM, which is presented on a basis other than in accordance with IAS 33, includes the full impact of the share consolidation as if it had taken place at the start of the previous financial year. - It excludes net pension finance costs and fair value remeasurements of financial instruments. Net
pension finance costs are impacted by corporate bond yields, which can fluctuate significantly and are reset each year based on often volatile external market factors. Fair value remeasurements are impacted by changes to credit risk and various market indices, which can fluctuate significantly. Also included in these items are fair value remeasurements of financial instruments resulting from liability management exercises. This is a key management incentive metric.
* Operating profit is presented on the Group income statement. It is not defined per IFRS, however, is a generally accepted profit measure.
Glossary - Alternative performance measures continued
Closest Adjustments equivalent to reconcile Definition APM IFRS measure to IFRS measure and purpose Tax measures Effective tax Effective - Exceptional - Effective tax rate before exceptional rate before tax rate items and items and amortisation of acquired exceptional their tax intangibles is calculated as total items and amortisation impact income tax credit/(charge) excluding of acquired - Amortisation the tax impact of exceptional intangibles of acquired items and amortisation of acquired intangibles intangibles from continuing operations and their divided by profit before tax before tax impact exceptional items and amortisation of acquired intangibles from continuing operations. This provides an indication of the ongoing tax rate across the Group. Effective tax Effective - Exceptional - Effective tax rate before exceptional rate before tax rate items and items and amortisation of acquired exceptional their tax intangibles, net pension finance items and amortisation impact costs and fair value remeasurements of acquired - Amortisation of financial instruments is calculated intangibles, of acquired as total income tax credit/(charge) net pension intangibles excluding the tax impact of exceptional finance costs and their items and amortisation of acquired and fair value tax impact intangibles items, net pension remeasurements - Net pension finance costs and fair value remeasurements of financial finance costs from continuing operations divided instruments and their by the profit before tax before tax impact exceptional items and amortisation - Fair value of acquired intangibles, net pension remeasurements finance costs and fair value remeasurements of financial from continuing operations. instruments and their tax impact Balance sheet measures Net debt Borrowings - Net debt - Net debt excludes the net debt less cash from Tesco of Tesco Bank but includes that and related Bank of the discontinued operations hedges to reflect the net debt obligations of the Retail business. Net debt comprises bank and other borrowings, lease liabilities, 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 the Group's balance sheet position and is a measure widely used by credit rating agencies. Total indebtedness Borrowings - Consistent - Total indebtedness is the net less cash with accounting debt plus the IAS 19 deficit in and related policy the pension schemes (net of associated hedges deferred tax) 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 measure widely used by credit rating agencies. Total indebtedness No direct - Consistent - Total indebtedness ratio is Ratio equivalent with accounting calculated as Total indebtedness policy divided by the rolling 12-month Retail EBITDA. It is a measure of the Group's ability to meet its payment obligations and is widely used by analysts and credit rating agencies. Fixed charge No direct - Consistent - Fixed charge cover is calculated cover equivalent with accounting as the rolling 12-month Retail policy EBITDA divided by the sum of net finance costs (excluding net pension finance costs, finance charges payable on lease liabilities, exceptional items, capitalised interest and fair value remeasurements) and all lease liability payments from continuing operations. It is a measure of the Group's ability to meet its payment obligations and is widely used by analysts and credit rating agencies.
Glossary - Alternative performance measures continued
Adjustments Closest equivalent to reconcile Definition APM IFRS measure to IFRS measure and purpose Cash flow measures Retail operating Cash generated - Tesco Bank - Retail operating cash flow is the cash flow from operating operating cash cash generated from continuing operations, activities flow excluding the effects of Tesco Bank's - Discontinued cash flows. It is a measure of the operations cash generation and working capital efficiency of the Retail business, recognising that Tesco Bank is run and regulated independently from the Retail operations. This is a key management incentive metric. Free cash flow Cash generated - Net cash - Free cash flow includes all cash from operating generated from/ flows from continuing operations activities (used in) investing from operating and investing activities, activities, the market purchase of shares net and the market of proceeds from shares issued in purchase of relation to share schemes, and repayment shares issued of obligations under leases. The in relation following items are excluded: investing to share schemes cash flows that increase/decrease - Repayment items within Group net debt, and of obligations cash flows from major corporate acquisitions under leases and disposals. This measure reflects - Investing the cash available to shareholders. cash flows that increase/decrease items within Group net debt - Cash flows from major corporate acquisitions and disposals Retail free Cash generated - Tesco Bank - Retail free cash flow includes cash flow from operating operating cash all cash flows from continuing operations activities flow from operating and investing activities - Retail cash for the Retail business, the market generated from/ purchase of shares net of proceeds (used in) investing from shares issued in relation to activities, share schemes, and the repayment and the market of obligations under leases. The purchase of following items are excluded: investing shares issued cash flows that increase/decrease in relation items within Net debt, and cash flows to share schemes from major corporate acquisitions - Repayment and disposals. This measure reflects of obligations the cash available to shareholders. under leases This is a key management incentive - Investing metric. cash flows that increase/decrease items within Net debt - Cash flows from major corporate acquisitions and disposals
As detailed in the basis of consolidation, refer to Note 1, for the UK & ROI, the prior year results are for the 53 weeks ended 29 February 2020. For all other operations, the prior year results are for the calendar year ended 29 February 2020.
In order to provide comparability with the current year results for the 52 weeks ended 27 February 2021, the tables below present the Group's prior year statutory results on a 53-week basis to 29 February 2020, adjusted to remove the results of week 53 for the UK & ROI to also separately present the APMs on a 52-week basis to 22 February 2020. In determining the week 53 adjustment for the UK & ROI, revenue, sales and cost of goods sold represent the actual trading performance in that week, with overhead expenses allocated proportionally to week 53 based on the reported results for the 53 weeks to 29 February 2020. No week 53 adjustments are required with respect to the Group's operations in Central Europe, Asia or Tesco Bank, which report on a calendar year basis.
The prior year results on a 53-week basis to 29 February 2020 and APMs on a 52-week basis to 22 February 2020 have been restated to present Thailand, Malaysia and Poland as discontinued operations. See Note 7 for further details.
Glossary - Alternative performance measures continued
APMs: Reconciliation of income statement measures
APM 2020 2020 As reported APM on a 53-week Exclude 52-week week 2021 basis 53 basis UK &ROI Notes GBPm GBPm GBPm GBPm Continuing operations Group sales 2 48,848 45,752 (843) 44,909 Revenue 2 53,170 52,898 (983) 51,915 Operating profit before exceptional items and amortisation of acquired intangibles 2 1,866 2,202 (46) 2,156 Operating margin 2 3.5% 4.2% - 4.2% Growth in sales at actual rates 8.8% 2.0% (1.9)% 0.1% Growth in sales at constant rates 8.6% 2.1% (1.9)% 0.2% APM 2020 2020 As reported APM on a 53-week Exclude 52-week week 2021 basis 53 basis Total Group Notes GBPm GBPm GBPm GBPm Continuing operations Group sales 2 53,445 50,788 (843) 49,945 Revenue 2 57,887 58,091 (983) 57,108 Operating profit before exceptional items and amortisation of acquired intangibles 2 1,815 2,571 (46) 2,525 Operating margin 2 3.1% 4.4% - 4.4% Growth in sales at actual rates 7.1% 1.4% (1.8)% (0.4)% Growth in sales at constant rates 7.0% 1.7% (1.8)% (0.1)% 2020 APM As reported APM on a 53-week Exclude 2020 week 52-week Notes 2021 basis 53 basis Operating profit before exceptional items and amortisation of acquired intangibles ( GBP m) 2 1,815 2,571 (46) 2,525 Share of post-tax profits/(losses) of joint ventures and associates before exceptional items and amortisation of acquired intangibles (GBPm) 26 - - - Net finance costs before exceptional items and amortisation of acquired intangibles (GBPm) 5 (937) (1,019) 27 (992) Profit before tax from continuing operations before exceptional items and amortisation of acquired intangibles (GBPm) 904 1,552 (19) 1,553
Add: Net pension finance costs (GBPm) 5 43 71 - 71 Add: Fair value remeasurements of financial instruments (GBPm) 5 214 246 (18) 228 Profit before tax from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments ( GBP m) 1,161 1,869 (37) 1,832 Total income tax credit/(charge) before exceptional items, net pension finance costs and fair value remeasurements of financial instruments (GBPm) 9 (249) (400) 7 (393) Effective tax rate before exceptional items, net pension finance costs and fair value remeasurements of financial instruments (%) 21.4% 21.4% 0.1% 21.5% Profit before tax from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments attributable to the owners of the parent (GBPm) 9 1,168 1,869 (37) 1,832 Taxation on profit from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments attributable to the owners of the parent (GBPm) 9 (249) (400) 7 (393) Profit after tax from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments attributable to the owners of the parent (GBPm) 919 1,469 (30) 1,439 Basic weighted average number of shares (millions) 9 9,629 9,716 - 9,716 Basic earnings per share from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments (pence) 9.54 15.12 (0.31) 14.81 Diluted weighted average number of shares (millions) 9 9,656 9,783 - 9,783 Diluted earnings per share from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments (pence) 9.52 15.02 (0.31) 14.71
Glossary - Alternative performance measures continued
Diluted earnings per share from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements (adjusted for share consolidation)
APM 2020 2020 As reported APM on a 53-week Exclude 52-week week Notes 2021 basis 53 basis Weighted average number of diluted shares Diluted weighted average number of shares (millions) 9,656 9,783 - 9,783 Adjustment to reflect the post-consolidation share base as if it had been in place from the start of the previous financial year (millions) (1,956) (2,045) - (2,045) Adjusted diluted weighted average number of shares (adjusted for share consolidation) (millions) 7,700 7,738 - 7,738 Diluted earnings per share from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements (pence) 9.52 15.02 (0.31) 14.71 Adjustment to reflect the post-consolidation share base as if it had been in place from the start of the previous financial year (pence) 2.42 3.96 (0.07) 3.89 Diluted earnings per share from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements (adjusted for share consolidation) (pence) 11.94 18.98 (0.38) 18.60
Retail EBITDA
APM 2020 2020 As reported APM on a 53-week 52-week Exclude week 2021 basis 53 basis Notes GBPm GBPm GBPm GBPm Operating profit/(loss) from continuing operations before exceptional items and amortisation of acquired intangibles 2 1,815 2,571 (46) 2,525 Add/(less): Tesco Bank operating loss/(profit) before exceptional items 2 175 (193) - (193) Retail operating profit/(loss) from continuing operations before exceptional items and amortisation of acquired intangibles 2 1,990 2,378 (46) 2,332 Add: Depreciation and amortisation (excluding amortisation of acquired intangibles) 2 1,671 1,730 (29) 1,701 Less: Tesco Bank depreciation and amortisation 2 (57) (141) - (141) Retail EBITDA 3,604 3,967 (75) 3,892
APMs: Reconciliation of balance sheet measures
Total indebtedness ratio
APM 2020 2020 As reported APM on a 53-week Exclude 52-week week Notes 2021 basis 53 basis Net debt ( GBP m) (a)(b) 32 11,955 12,298 (197) 12,101 Add: Defined benefit pension deficit, net of deferred tax (GBPm)(a) 29 1,004 2,573 - 2,573 Total indebtedness ( GBP m)(a) 12,959 14,871 (197) 14,674 Retail EBITDA ( GBP m) 3,604 3,967 (75) 3,892 Total indebtedness ratio 3.6 3.7 0.1 3.8
(a) Net debt, Total indebtedness and the defined benefit pension deficit, net of deferred tax on a 52-week basis are as at 22 February 2020.
(b) Free cash outflow in week 53 of GBP197m has been deducted from Net debt as at 29 February 2020 to determine the Group's 52-week Total indebtedness ratio.
Glossary - Alternative performance measures continued
Fixed charge cover
APM APM 2020 Exclude 2020 As reported on a 53-week week 52-week Notes 2021 basis 53 basis Net finance cost (GBPm) 5 937 1,170 (27) 1,143 Less: Net pension finance cost (GBPm) 5 (43) (71) (71) Less: Exceptional fair value remeasurement on restructuring derivative financial instruments (GBPm) 5 - (180) - (180) Add: Exceptional gain on Tesco Bank mortgage book disposal (GBPm) 5 - 29 - 29 Add: Fair value remeasurements on financial instruments (GBPm) 5 (214) (246) 18 (228) Total finance costs before exceptional items, net pension finance costs and fair value remeasurements on financial instruments (GBPm) 680 702 (9) 693 Add: Capitalised interest (GBPm) 5 - - - - Less: Finance charges payable on lease liabilities (GBPm) 5 (446) (486) 6 (480) Net finance cost, excluding net pension finance costs, exceptional items, capitalised interest, fair value remeasurements of financial instruments and finance charges payable on lease liabilities (GBPm) 234 216 (3) 213 Add: Retail total lease liability payments (GBPm) 12 1,104 1,170 - 1,170 Less: Retail discontinued operations total lease liability payments (GBPm) (99) (122) - (122)
1,239 1,264 (3) 1,261 Retail EBITDA ( GBP m) 3,604 3,967 (75) 3,892 Fixed charge cover 2.9 3.1 - 3.1
APMs: Reconciliation of cash flow measures
APM APM 2020 Exclude 2020 As reported on a 53-week week 52-week 2021 basis 53 basis Notes GBPm GBPm GBPm GBPm Retail cash flows generated from operations excluding working capital 2 723 3,633 (63) 3,570 Retail (increase)/decrease in working capital 2 439 (53) 240 187 Retail operating cash flow 2 1,162 3,580 177 3,757 Retail interest and corporation tax paid(a) 2 (841) (958) 27 (931) Retail cash generated from/(used in) operating activities 2 321 2,622 204 2,826 Retail cash generated from/(used in) investing activities 2 6,890 (1,102) (7) (1,109) Retail own shares purchased 2 (66) (149) - (149) Retail repayments of obligations under leases 2 (561) (565) - (565) Less: Retail cash inflow from major disposal(b) 2 (5,337) - - - Less: Retail increase/(decrease) in loans to joint ventures and associates 2 2 - - - Less: Retail net investments in/(proceeds from sale of) short-term investments 2 (62) 687 - 687 Retail free cash flow 2 1,187 1,493 197 1,690 Tesco Bank free cash flow 2 192 476 - 476 Free cash flow 1,379 1,969 197 2,166 (a) Retail interest paid in week 53 amounted to GBP27m.
(b) Retail cash flow from major disposal of GBP5,337m principally comprises the GBP7.8bn proceeds on disposal of the Group's Asia operations, excluding cash disposed and intercompany loan repayments, less the GBP2.5bn additional pension contribution. Refer to Notes 4 and 7 for further details.
Other
Capital expenditure (Capex) FTE percentage of promoters The additions to property, FTE refers to full-time (scoring 9-10). This plant and equipment, equivalents. generates a figure between investment property and LIBOR -100 and 100 which is intangible assets (excluding London Inter-Bank Offered the NPS. assets acquired under Rate. Return on capital employed business combinations). LPI (ROCE) Capital employed LPI refers to limited Return divided by the Net assets plus net debt price inflation. average of opening and plus dividend creditor Market capitalisation closing capital employed. less net assets of the The total value of all Return disposal group and non-current Tesco shares calculated Profit before exceptional assets classified as as total number of shares items and interest, after held for sale. multiplied by the closing tax (applied at effective CPI share price at year end. rate of tax). CPI refers to consumer MTN RPI price index. MTN refers to medium RPI refers to the retail Enterprise Value term note. price index. This is calculated as MREL SONIA market capitalisation Minimum requirements Sterling Overnight Index plus net debt. for own funds and eligible Average. EURIBOR liabilities (European Total shareholder return Euro Interbank Offered Banking Authority). The notional annualised Rate. Net promoter score (NPS) return from a share, ESG This is a loyalty measure measured as the percentage Environmental, social based on a single question change in the share price, and governance. requiring a score between plus the dividends paid 0-10. The NPS is calculated with the gross dividends, by subtracting the percentage reinvested in Tesco shares. of detractors (scoring This is measured over 0-6) from the both a one and five-year period.
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