Tesco plc Annual Report and Financial Statements 2012

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Notes to the Group financial statements Note 21 Financial instruments Derivatives are used to hedge exposure to market risks and those that are held as hedging instruments are formally designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting purposes and the Group’s hedging policies are further described below. Finance income of £3m (2011: £27m) resulted 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 £263m on hedging instruments was recognised during the financial year, offset by a loss of £260m on hedged items (2011: a loss of £369m on hedging instruments was offset by a gain of £396m 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. These 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. The Group also uses index-linked swaps to hedge cash flows on index-linked debt, interest rate swaps to hedge interest cash flows on debt and cross currency swaps to hedge intercompany loan cash flows denominated in foreign currencies. Net investment hedges The Group uses forward foreign currency contracts, currency denominated borrowings and currency swaps to hedge the exposure of a portion of its non-Sterling denominated assets against changes in value due to changes in foreign exchange rates. At the start of the year the Group had a South Korean Won denominated liability relating to the future purchase of the minority shareholding of its subsidiary, Homeplus Co., Limited. This liability was designated as a net investment hedge of a proportion of the assets of Homeplus Co., Limited. This option was exercised during the financial year. Gains and losses accumulated in equity are included in the Group Income Statement on disposal of the overseas operations. Financial instruments not qualifying for hedge accounting The Group’s policy is not to use 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 caps, 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 fair value of derivative financial instruments have been disclosed in the Group Balance Sheet as follows: Asset £m 2012 2011 Current 41 (128) 148 (255) Non-current 1,726 (688) 1,139 (600) 1,767 (816) 1,287 (855) 122 Tesco PLC Annual Report and Financial Statements 2012 Liability £m Asset £m Liability £m
OVERVIEW Note 21 Financial instruments continued STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS The fair value and notional amounts of derivatives analysed by hedge type are as follows: Fair value £m 2012 2011 Asset Liability Asset Liability Notional £m Fair value £m Notional £m Fair value £m Notional £m Fair value £m Fair value hedges Interest rate swaps and similar instruments 96 1,751 (68) 2,031 27 1,410 (57) 1,844 Cross currency swaps 818 2,686 (8) 269 717 2,674 (28) 714 Cash flow hedges Interest rate swaps and similar instruments – – (132) 400 – – (54) 455 Cross currency swaps 233 304 (41) 988 126 298 (151) 784 Index-linked swaps 30 809 – – – – (8) 772 Forward foreign currency contracts 23 733 (21) 1,211 8 346 (12) 1,269 Net investment hedges Forward foreign currency contracts – – (7) 969 19 383 (97) 952 Future purchases of non-controlling interests – – – – – – (106) – Cash flow hedges and net investment hedges Cross currency swaps – – (1) 318 – – – – Derivatives not in a formal hedge relationship Interest rate swaps and similar instruments 3 25 (1) 25 1 25 (1) 25 Cross currency swaps 3 146 (4) 56 2 84 (10) 65 Index-linked swaps 539 3,149 (468) 3,149 376 2,639 (311) 2,639 Forward foreign currency contracts 22 923 (62) 1,282 11 523 (20) 720 Future purchases of non-controlling interests – – (3) – – – – – Total 1,767 10,526 (816) 10,698 1,287 8,382 (855) 10,239 The carrying value and fair value of financial assets and liabilities are as follows: Carrying value £m Notional £m 2012 2011* Assets Cash and cash equivalents 2,305 2,305 2,428 2,428 Loans and advances to customers – Tesco Bank 4,403 4,440 4,641 4,636 Short-term investments 1,243 1,243 1,022 1,022 Other investments – Tesco Bank 1,526 1,524 938 923 Joint venture and associates loan receivables (Note 28) 384 384 503 514 Other receivables 10 10 25 25 Derivative financial assets: Interest rate swaps and similar instruments 99 99 28 28 Cross currency swaps 1,054 1,054 845 845 Index-linked swaps 569 569 376 376 Forward foreign currency contracts 45 45 38 38 Total financial assets 11,638 11,673 10,844 10,835 Liabilities Short-term borrowings: Amortised cost (1,806) (1,841) (708) (707) Bonds in fair value hedge relationships – – (628) (614) Long-term borrowings: Amortised cost (4,575) (4,966) (4,584) (4,678) Bonds in fair value hedge relationships (5,202) (5,140) (4,957) (4,915) Finance leases (Group as lessee – Note 34) (166) (166) (198) (198) Customer deposits – Tesco Bank (5,387) (5,410) (5,074) (5,081) Deposits by banks – Tesco Bank (78) (78) (36) (36) Derivative and other financial liabilities: Interest rate swaps and similar instruments (201) (201) (112) (112) Cross currency swaps (54) (54) (189) (189) Index-linked swaps (468) (468) (319) (319) Forward foreign currency contracts (90) (90) (129) (129) Future purchases of non-controlling interests (3) (3) (106) (106) Total financial liabilities (18,030) (18,417) (17,040) (17,084) Total (6,392) (6,744) (6,196) (6,249) * See Note 1 Accounting policies for details of reclassifications. Tesco PLC Annual Report and Financial Statements 2012 123 Fair value £m Carrying value £m Fair value £m
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Annual Report and Financial Stateme
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Trading profit £529m 14% of Group
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OVERVIEW Chairman’s statement Cha
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OVERVIEW Chief Executive’s review
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OVERVIEW STRATEGIC REVIEW PERFORMAN
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OVERVIEW Strategy in action IN THIS
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OVERVIEW Quality and innovation STR
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OVERVIEW Clothing The UK clothing m
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OVERVIEW Click & Collect Click & Co
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OVERVIEW Smaller format stores Smal
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OVERVIEW Fresh & Easy: progress in
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OVERVIEW Savings and loans New prod
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OVERVIEW Business model -- Core act
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OVERVIEW Our KPIs measure how we ar
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OVERVIEW Group strategy: To be an o
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OVERVIEW Financial review Laurie Mc
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OVERVIEW US trading loss £(142)m
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OVERVIEW Board of Directors Governa
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OVERVIEW Board of Directors STRATEG
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OVERVIEW Principal risks Reputation
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OVERVIEW Principal risks Product sa
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OVERVIEW Principal risks Credit ris
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OVERVIEW Financial risks review STR
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OVERVIEW Governance structures STRA
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OVERVIEW Length of service of each
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OVERVIEW Remuneration Committee Rem
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OVERVIEW A Board visit is organised
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OVERVIEW The areas covered by the C
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OVERVIEW Remuneration policy for Ex
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OVERVIEW Share ownership guidelines
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Page 115 and 116: OVERVIEW Note 10 Goodwill and other
Page 117 and 118: OVERVIEW Note 11 Property, plant an
Page 119 and 120: OVERVIEW Note 12 Investment propert
Page 121 and 122: OVERVIEW Note 13 Group entities con
Page 123 and 124: OVERVIEW Note 17 Loans and advances
Page 125: OVERVIEW Note 20 Borrowings Current
Page 129 and 130: OVERVIEW Note 21 Financial instrume
Page 131 and 132: OVERVIEW Note 22 Financial risk fac
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Page 135 and 136: OVERVIEW Note 24 Provisions continu
Page 137 and 138: OVERVIEW Note 25 Share-based paymen
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Page 145 and 146: OVERVIEW Note 34 Leasing commitment
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Page 153 and 154: OVERVIEW Note 11 Share-based paymen
Page 157 and 158: Financial calendar Financial year e
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Tesco plc Annual Report and Financial Statements 2012

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