Tesco plc Annual Report and Financial Statements 2008

Notes to the Parent Company financial statements continued
Note 1 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 investment activities. The Company does not hold or issue derivative
financial instruments for trading purposes, however if derivatives do not
qualify for hedge accounting they are accounted for as such.
Derivative financial instruments are recognised and stated at fair value.
The fair value of derivative financial instruments is determined by reference
to market values for similar financial instruments, or by discounted cash
flows or by the use of option valuation models. Where derivatives do not
qualify for hedge accounting, any gains or losses on remeasurement are
immediately recognised in the Profit and Loss Account. 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 period end to ensure that the hedge remains highly effective.
Financial instruments with maturity dates of more than one year from the
Balance Sheet date are disclosed as falling due after more than one year.
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 Profit and
Loss Account, together with any changes in the fair value of the hedged
item that is attributable to the hedged risk.
Derivative financial instruments qualifying for fair value hedge accounting
are principally interest rate swaps (including cross-currency swaps).
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
instrument is recognised directly in equity.
The associated cumulative gain or loss is removed from equity and
recognised in the Profit and Loss Account in the same period or periods
during which the hedged transaction affects the Profit and Loss Account.
The classification of the effective portion when recognised in the Profit and
Loss Account is the same as the classification of the hedged transaction.
Any element of the remeasurement of the derivative instrument which
does not meet the criteria for an effective hedge is recognised immediately
in the Profit and Loss Account.
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Tesco PLC Annual Report and
Financial Statements 2008
Derivative instruments qualifying for cash flow hedging are principally
forward foreign exchange transactions and currency options.
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 equity until the forecasted transaction
occurs. If a hedged transaction is no longer expected to occur, the net
cumulative gain or loss recognised in equity is transferred to the Profit
and Loss Account.
Net investment hedging
Derivative financial instruments are classified as net investment hedges
when they hedge the Company’s net investment in an overseas operation.
The effective element of any foreign exchange gain or loss from remeasuring
the derivative instrument is recognised directly in equity. Any ineffective
element is recognised immediately in the Profit and Loss Account. Gains
and losses accumulated in equity are included in the Profit and Loss Account
when the foreign operation is disposed of.
Derivative instruments qualifying for net investment hedging are principally
forward foreign exchange transactions and currency options.
Pensions
The Company participates in the Tesco PLC Pension Scheme which is
a multi-employer scheme within the Tesco Group and cannot identify its
share of the underlying assets and liabilities of the scheme. Accordingly,
as permitted by FRS 17 ‘Retirement Benefits’, the Company has accounted
for the scheme as a defined contribution scheme, and the charge for the
period is based upon the cash contributions payable.
Taxation
Corporation tax payable is provided on the taxable profit for the year, using
tax rates enacted or substantively enacted by the Balance Sheet date.
Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the Balance Sheet date and would give rise
to an obligation to pay more or less taxation in the future.
Deferred tax assets are recognised to the extent that they are recoverable.
They are regarded as recoverable to the extent that on the basis of all
available evidence, it is regarded as more likely than not that there will
be suitable taxable profits from which the future reversal of the underlying
timing differences can be deducted.
Deferred tax is measured on a non-discounted basis at the tax rates that
are expected to apply in the periods in which the timing differences reverse,
based on tax rates and laws that have been substantively enacted by the
Balance Sheet date.
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