Tesco plc Annual Report and Financial Statements 2008

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Notes to the Group financial statements continued Note 20 Financial instruments Derivatives are used for hedging in the management of exposure to market risks. This enables the optimisation of the overall cost of accessing debt capital markets, and to mitigate the market risk which would otherwise arise from the maturity and other profiles of assets and liabilities. Hedging policies using derivative financial instruments are further explained below. Derivatives that are held as hedging instruments are formally designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting purposes as described below. There is no material impact on the Group Income Statement resulting from hedge ineffectiveness. 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. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Group Income Statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss on the hedging instrument and hedged item is recognised in the Group Income Statement within finance income or costs. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying value of the hedged item is amortised to the Group Income Statement under the effective interest rate method. A gain of £261m on hedging instruments was recognised during the year, offset by a loss of £261m on hedged items (in 2007, a loss of £13m on hedging instruments was offset by a gain of £13m on hedged items). Cash flow hedges The Group uses forward foreign currency contracts to hedge the cost of future purchases of goods for resale, where those purchases are denominated in a currency other than the functional currency of the purchasing company. Where these contracts qualify for hedge accounting, mark-to-market gains and losses are deferred in equity. The hedging instruments are primarily used to hedge purchases in Euros and US Dollars. The cash flows hedged will occur and will affect the Group Income Statement within one year of the Balance Sheet date. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is recognised in the Group Income Statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the Group Income Statement. Net investment hedges The Group uses forward foreign currency contracts, currency denominated borrowings and currency options to hedge the exposure of a proportion of its non-Sterling denominated assets against changes in value due to changes in foreign exchange rates. The Group has a South Korean Won denominated liability relating to the future purchase of the minority shareholding of its subsidiary, Samsung Tesco Co. Limited. This liability has been designated as a net investment hedge of a proportion of the assets of Samsung Tesco Co. Limited. The Group has a Chinese Yuan denominated liability relating to the future purchase of the minority shareholding of its subsidiary, Hymall. This liability has been designated as a net investment hedge of a proportion of the assets of Hymall. Gains and losses accumulated in equity are included in the Group Income Statement on disposal of the overseas operation. Financial instruments not qualifying for hedge accounting The Group’s policy is not to use derivatives for trading purposes; however, some derivatives may not qualify for hedge accounting, or are specifically not designated as a hedge where natural offset is appropriate. These instruments include caps, collars, interest rate swaps and forward foreign currency contracts. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the Group Income Statement within finance income or costs. The Group has a liability relating to the future purchase of the minority shareholding of its subsidiary, dunnhumby Limited. Changes in the value of the liability are recognised immediately in the Group Income Statement within finance income or costs. The fair value of derivative financial instruments have been disclosed in the Group Balance Sheet as follows: 2008 2007 Asset Liability Asset Liability £m £m £m £m Current 97 (443) 108 (87) Non-current 216 (322) – (399) 313 (765) 108 (486) 74 Tesco PLC Annual Report and Financial Statements 2008 www.tesco.com/annualreport08
Note 20 Financial instruments continued The fair value and notional amounts of derivatives analysed by hedge type are as follows: 2008 2007 Asset Liability Asset Liability Fair value Notional Fair value Notional Fair value Notional Fair value Notional £m £m £m £m £m £m £m £m Fair value hedges Interest rate swaps and similar instruments 2 125 (80) 657 7 267 (69) 717 Cross currency swaps 252 2,795 – – – – (45) 1,174 Cash flow hedges Interest rate swaps and similar instruments – – – – – – (9) 988 Cross currency swaps – – (1) 17 – – – – Forward foreign currency contracts 19 811 (9) 387 2 73 (25) 691 Net investment hedges Forward foreign currency contracts 2 289 (218) 2,328 65 3,053 (8) 1,292 Future purchases of minority interests – – (197) – – – (268) – Derivatives not in a formal hedge relationship Interest rate swaps and similar instruments 6 3,668 (2) 189 5 1,570 (1) 230 Cross currency swaps – – (16) 347 – – – – Forward foreign currency contracts 32 1,641 (207) 2,816 29 1,236 (23) 687 Future purchases of minority interests – – (35) – – – (38) – Total 313 9,329 (765) 6,741 108 6,199 (486) 5,779 Carrying and fair value of financial assets and liabilities at financial year ending: 2008 2007 Carrying Fair Carrying Fair value value value value £m £m £m £m Assets Finance leases (Group as lessor – note 32) 5 5 12 12 Cash and cash equivalents 1,788 1,788 1,042 1,042 Short-term investments 360 360 – – Joint venture loan receivables 173 173 163 163 Derivative financial assets: Interest rate swaps and similar instruments 8 8 12 12 Cross currency swaps 252 252 – – Forward foreign currency contracts 53 53 96 96 Total financial assets 2,639 2,639 1,325 1,325 Liabilities Short-term borrowings: Amortised cost (1,511) (1,516) (1,251) (1,251) Bonds in fair value hedge relationships (522) (502) (267) (258) Long-term borrowings: Amortised cost (2,269) (2,138) (2,060) (2,028) Bonds in fair value hedge relationships (3,488) (3,261) (1,939) (1,921) Finance leases (Group as lessee – note 32) (266) (266) (183) (183) Derivative and other financial liabilities: Interest rate swaps and similar instruments (81) (81) (79) (79) Cross currency swaps (18) (18) (45) (45) Forward foreign currency contracts (434) (434) (56) (56) Future purchases of minority interests (232) (232) (306) (306) Total financial liabilities (8,821) (8,448) (6,186) (6,127) Total (6,182) (5,809) (4,861) (4,802) The fair values of financial instruments have been determined by reference to prices available from the markets on which the instruments are traded. The fair value of all other items have been calculated by discounting expected future cash flows at prevailing interest rates. The above table excludes other receivables/payables, which have fair values equal to their carrying values. Tesco PLC Annual Report and Financial Statements 2008 75
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Tesco PLC Annual Report and Financi
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Financial highlights Growth on 2007
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Report of the Directors The Directo
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International contributed £701m to
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Current trading We have seen a stro
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2008 2007 Total shareholder return
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Our business in Poland had a good y
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Tesco Personal Finance (TPF) TPF is
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and put the community at the heart
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Joint venture governance and partne
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Political and charitable donations
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Members’ attendance during the ye
Page 25 and 26: Internal controls Accountability fo
Page 27 and 28: Directors’ remuneration report ye
Page 29 and 30: The Committee considers TSR perform
Page 31 and 32: Share options Options over shares w
Page 33 and 34: Non-executive Directors Non-executi
Page 35 and 36: Table 4 Share options held by Direc
Page 37 and 38: Table 6 Long-Term Performance Share
Page 39 and 40: Table 10 Directors’ interests in
Page 41 and 42: Go online! Every year, more and mor
Page 43 and 44: Independent auditors’ report to t
Page 45 and 46: Group statement of recognised incom
Page 47 and 48: Group cash flow statement year ende
Page 49 and 50: Note 1 Accounting policies continue
Page 55 and 56: Note 2 Segmental reporting The Boar
Page 57 and 58: Note 2 Segmental reporting continue
Page 59 and 60: Note 5 Finance income and costs 200
Page 61 and 62: Note 6 Taxation continued Deferred
Page 63 and 64: Note 7 Discontinued operation and a
Page 65 and 66: Note 10 Goodwill and other intangib
Page 67 and 68: Note 11 Property, plant and equipme
Page 69 and 70: Note 11 Property, plant and equipme
Page 71 and 72: Note 13 Group entities continued (a
Page 73 and 74: Note 14 Other investments continued
Page 75: Note 19 Borrowings Current Maturity
Page 79 and 80: Note 21 Financial risk factors cont
Page 81 and 82: Note 21 Financial risk factors cont
Page 83 and 84: Note 23 Share-based payments contin
Page 85 and 86: Note 24 Post-employment benefits Pe
Page 87 and 88: Note 24 Post-employment benefits co
Page 89 and 90: Note 25 Called up share capital 200
Page 91 and 92: Note 26 Statement of changes in equ
Page 93 and 94: Note 27 Business combinations conti
Page 95 and 96: Note 30 Analysis of changes in net
Page 97 and 98: Note 32 Leasing commitments continu
Page 99 and 100: UK GAAP IFRS 2004 2005 2005 20061 5
Page 101 and 102: Notes to the Parent Company financi
Page 103 and 104: Note 2 Auditor remuneration 2008 20
Page 105 and 106: Note 9 Borrowings Maturity 2008 200
Page 107 and 108: Note 11 Share-based payments contin
Page 109 and 110: Note 14 Reserves Restated* 2008 200
Page 111 and 112: Cover: Kana and son Tesco Express,
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