Tesco plc Annual Report and Financial Statements 2008

Notes to the Group financial statements continued
Note 1 Accounting policies continued
Business combinations and goodwill
All business combinations are accounted for by applying the purchase method.
On acquisition, the assets (including intangible assets), liabilities and
contingent liabilities of an acquired entity are measured at their fair value.
The interest of minority shareholders is stated at the minority’s proportion
of the fair values of the assets and liabilities recognised.
The Group recognises intangible assets as part of business combinations
at fair value at the date of acquisition. The determination of these fair
values is based upon management’s judgement and includes assumptions
on the timing and amount of future incremental cash flows generated
by the assets acquired and the selection of an appropriate cost of capital.
The useful lives of intangible assets are estimated, and amortisation
charged on a straight-line basis.
Goodwill arising on consolidation represents the excess of the cost of an
acquisition over the fair value of the Group’s share of the net assets/net
liabilities of the acquired subsidiary, joint venture or associate at the date of
acquisition. If the cost of acquisition is less than the fair value of the Group’s
share of the net assets/net liabilities of the acquired entity (i.e. a discount
on acquisition) then the difference is credited to the Group Income Statement
in the period of acquisition.
At the acquisition date of a subsidiary, goodwill acquired is recognised as
an asset and is allocated to each of the cash-generating units expected to
benefit from the business combination’s synergies and to the lowest level
at which management monitors the goodwill. Goodwill arising on the
acquisition of joint ventures and associates is included within the carrying
value of the investment.
Goodwill is reviewed for impairment at least annually by assessing the
recoverable amount of each cash-generating unit to which the goodwill
relates. The recoverable amount is the higher of fair value less costs to sell,
and value in use. When the recoverable amount of the cash-generating
unit is less than the carrying amount, an impairment loss is recognised.
Any impairment is recognised immediately in the Group Income Statement
and is not subsequently reversed.
On disposal of a subsidiary, joint venture or associate, the attributable
amount of goodwill is included in the determination of the profit or loss
on disposal.
Goodwill arising on acquisitions before 29 February 2004 (the date of
transition to IFRS) was retained at the previous UK GAAP amounts subject
to being tested for impairment at that date. Goodwill written off to reserves
under UK GAAP prior to 1998 has not been restated and will not be
included in determining any subsequent profit or loss on disposal.
Intangible assets
Acquired intangible assets
Acquired intangible assets, such as software, pharmacy licences and brands,
are measured initially at cost and are amortised on a straight-line basis
over their estimated useful lives, usually at 2%-25% of cost per annum.
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Tesco PLC Annual Report and
Financial Statements 2008
Internally-generated intangible assets – Research and development
expenditure
Research costs are expensed as incurred.
Development expenditure incurred on an individual project is carried forward
only if all the criteria set out in IAS 38 ‘Intangible Assets’ are met, namely:
> an asset is created that can be identified (such as software or new
processes);
> it is probable that the asset created will generate future economic
benefits; and
> the development cost of the asset can be measured reliably.
Following the initial recognition of development expenditure, the cost is
amortised over the project’s estimated useful life, usually at 14%-25%
of cost per annum.
Impairment of tangible and intangible assets excluding goodwill
At each Balance Sheet date, the Group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication
that those assets have suffered an impairment loss. If such indication exists,
the recoverable amount of the asset is estimated in order to determine the
extent of the impairment loss (if any). Where the asset does not generate
cash flows that are independent from other assets, the Group estimates the
recoverable amount of the cash-generating unit to which the asset belongs.
The recoverable amount is the higher of fair value less costs to sell, and
value in use. If the recoverable amount of an asset (or cash-generating unit)
is estimated to be less than its carrying amount, the carrying amount of
the asset (or cash-generating unit) is reduced to its recoverable amount.
An impairment loss is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of
the asset (or cash-generating unit) is increased to the revised estimate of
the recoverable amount, but so that the increased carrying amount does
not exceed the carrying amount that would have been determined if no
impairment loss had been recognised for the asset (or cash-generating
unit) in prior years. A reversal of an impairment loss is recognised as
income immediately.
Inventories
Inventories comprise goods held for resale and properties held for, or in
the course of, development and are valued at the lower of cost and fair
value less costs to sell using the weighted average cost basis.
Short-term investments
Short-term investments in the Group Balance Sheet consist of deposits
with money market funds.
Cash and cash equivalents
Cash and cash equivalents in the Group Balance Sheet consist of cash
at bank and in hand and short-term deposits with an original maturity
of three months or less.
Non-current assets held for sale
Non-current assets and disposal groups are classified as held for sale if their
carrying amount will be recovered through sale rather than continuing use.
This condition is regarded as met only when the sale is highly probable and
the asset (or disposal group) is available for immediate sale in its present
condition. Management must be committed to the sale and it should be
expected to be completed within one year from the date of classification.
Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of carrying amount and fair value less costs to sell.
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