TIDMTSCO
RNS Number : 1912Q
Tesco PLC
15 February 2019
15 February 2019
TESCO PLC: INTRODUCING IFRS 16
Tesco PLC is hosting a briefing for analysts and investors at
9.00am UK time today relating to the introduction of IFRS 16, the
new financial reporting standard on accounting for leases. Tesco
will explain the nature of the standard and the associated changes
to the presentation of the Tesco financial statements and
performance measures using its most recently reported 1H 2018/19
results.
The standard has no economic impact on the Group. It has no
effect on how the business is run, nor on cash flows for the Group.
It does however have a significant impact on the way the assets,
liabilities and the income statement of the Group are presented, as
well as the classification of cash flows relating to lease
contracts.
IFRS 16 is effective for all accounting periods beginning on or
after 1 January 2019. As such, Tesco's first reported accounting
period under IFRS 16 will be the 2019/20 financial year, which runs
from 24 February 2019 to 29 February 2020. As previously indicated,
the Group intends to adopt the standard fully retrospectively.
In summary, IFRS 16 seeks to align the presentation of leased
assets more closely to owned assets. In doing so, a right of use
asset and lease liability are brought on to the balance sheet, with
the lease liability recognised at the present value of future lease
payments. Whilst the right of use asset is matched in value to the
lease liability at inception, it differs in value through the life
of the lease.
From an income statement perspective, the pre-IFRS 16 rental
charge is replaced by depreciation and interest. IFRS 16 therefore
results in a boost to operating profit, which is reported prior to
interest being deducted. Whilst depreciation reduces on a
straight-line basis, interest is charged on outstanding lease
liabilities and therefore for any given lease, interest is higher
in the earlier years and decreases over time. As a result, the
impact on the income statement below operating profit is highly
dependent on average lease maturity. For an immature portfolio,
depreciation and interest are higher than the rent they replace and
therefore IFRS 16 is dilutive to EPS. For a mature portfolio, they
are lower and therefore IFRS 16 is accretive.
Our 1H 2018/19 financial statements, restated for IFRS 16, will
form the prior period comparative numbers for the first published
IFRS 16 accounts in October 2019. The headline impacts of IFRS 16
on these statements can be summarised as follows:
-- Group sales and total cash flow are completely unaffected.
-- Group operating profit(1) increases by GBP188m to GBP1,121m
as rent is removed and only part-replaced by depreciation; Group
operating margin(2) increases by 59 basis points to 3.53%.
-- Profit before tax and Diluted EPS(3) both decrease, by
GBP(101)m and (0.91)p respectively, due to the combination of
depreciation and interest being higher than the rent they replace.
This is due to the relative immaturity of the Group's lease
portfolio, with leases being around one-third expired on average.
The proportion of EPS dilution will reduce as the portfolio matures
and, most notably, as underlying earnings increase.
-- Net assets reduce by GBP(1.4)bn to GBP13.0bn, as a 'new'
lease liability of GBP(10.6)bn and 'new' right of use asset of
GBP7.8bn are recognised and onerous lease provisions and other
working capital balances are derecognised.
-- Total indebtedness increases by GBP(3.3)bn to GBP(15.8)bn due
to lease extensions and contingent commitments being included and
lease-specific discount rates being applied.
Further detail on the impact of IFRS 16 on our 1H 2018/19
financial statements can be found in Note 1.
The introduction of IFRS 16 has no bearing on the plans or
financial ambitions Tesco has shared with the market. We will
continue to provide sufficient disclosure to translate progress
against our 2019/20 ambitions back to a pre-IFRS 16 basis.
Our 2018/19 preliminary results will continue to be reported on
a pre-IFRS 16 basis, accompanied by a headline summary of the
impact of the new standard. The full 2018/19 financial statements
prepared on an IFRS 16 basis will be shared shortly after the
preliminary results.
Contacts
Investor Relations Chris Griffith 01707 912 900
Media Simon Rew 01707 918 701
Philip Gawith, Teneo 0207 420 3143
1. Excludes amortisation of acquired intangibles and exceptional items
2. Group operating profit before exceptional items and
amortisation of acquired intangibles divided by Group Sales
3. Excludes exceptional items, amortisation of acquired
intangibles, net pension finance costs and fair value
re-measurements of financial instruments
Today's briefing will include a short presentation and Q&A.
Access will be by invitation only. There will be a live webcast
available on our website at www.tescoplc.com/investors. This will
include all Q&A and will be available for playback after the
event. All presentation materials, including a transcript, will be
made available on our website. No new material disclosures will be
made during the event.
Disclaimer
This document may contain forward-looking statements that may or
may not prove accurate. For example, statements regarding expected
revenue growth and operating margins, market trends and our product
pipeline are forward-looking statements. Phrases such as "aim",
"plan", "intend", "should", "anticipate", "well-placed", "believe",
"estimate", "expect", "target", "consider" and similar expressions
are generally intended to identify forward-looking statements.
Forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause actual
results to differ materially from what is expressed or implied by
the statements. Any forward-looking statement is based on
information available to Tesco as of the date of the statement. All
written or oral forward-looking statements attributable to Tesco
are qualified by this caution. Tesco does not undertake any
obligation to update or revise any forward-looking statement to
reflect any change in circumstances.
Note 1
These condensed consolidated financial statements for the 26
weeks ended 25 August 2018 and as at 25 August 2018 and 24 February
2018 do not constitute statutory accounts as defined in section 434
of the Companies Act 2006. A copy of the statutory accounts for the
52 weeks ended 24 February 2018 has been filed with the Registrar
of Companies. The auditor's report on those accounts was not
qualified, did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying the
report and did not contain statements under section 498(2) or (3)
of the Companies Act 2006.
Income Statement restatement for the 26 weeks ended 25 August
2018 (unaudited)
26 weeks ended 25 August 26 weeks ended 25 August
2018 reported 2018 restated
================
Before
Before exceptional Exceptional exceptional Exceptional
items and items and items and items and
amortisation amortisation amortisation amortisation
of acquired of acquired IFRS of acquired of acquired
intangibles intangibles Total 16 impact intangibles intangibles Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
====================================== =================== ============= ========= ================ ============= ============= =========
Continuing operations
Revenue 31,734 - 31,734 - 31,734 - 31,734
Cost of sales (29,783) (86) (29,869) 185 (29,598) (86) (29,684)
Gross profit/(loss) 1,951 (86) 1,865 185 2,136 (86) 2,050
Administrative expenses (1,010) (41) (1,051) 3 (1,007) (41) (1,048)
Profits/(losses) arising on
property-related
items (8) 13 5 - (8) 13 5
====================================== =================== ============= ========= ================ ============= ============= =========
Operating profit/(loss) 933 (114) 819 188 1,121 (114) 1,007
Share of post-tax profits/(losses)
of joint ventures and associates 20 11 31 (2) 18 11 29
Finance income 7 - 7 2 9 - 9
Finance costs (293) - (293) (289) (582) - (582)
====================================== =================== ============= ========= ================ ============= ============= =========
Profit/(loss) before tax 667 (103) 564 (101)(1) 566 (103) 463
Taxation (160) 22 (138) 13 (147) 22 (125)
====================================== =================== ============= ========= ================ ============= ============= =========
Profit/(loss) for the year from
continuing
operations 507 (81) 426 (88) 419 (81) 338
Discontinued operations
Profit/(loss) for the year from - - - - - - -
discontinued
operations
====================================== =================== ============= ========= ================ ============= ============= =========
Profit/(loss) for the year 507 (81) 426 (88) 419 (81) 338
====================================== =================== ============= ========= ================ ============= ============= =========
Earnings/(losses) per share from
continuing
and discontinued operations
Basic 4.40p (0.91)p 3.49p
Diluted 4.37p (0.90)p 3.47p
====================================== =================== ============= ========= ================ ============= ============= =========
Earnings/(losses) per share from
continuing
operations
Basic 4.40p (0.91)p 3.49p
Diluted 4.37p (0.90)p 3.47p
====================================== =================== ============= ========= ================ ============= ============= =========
KPIs and APMs
====================================== =================== ============= ========= ================ ============= ============= =========
Operating margin 2.94% 0.59% 3.53%
Diluted adjusted EPS 6.36p (0.91)p 5.45p
1. GBP(101)m PBT impact comprises: GBP522m rental charge
removal, GBP(340)m additional depreciation, GBP(287)m additional
net interest charge and GBP4 million other net gains.
Balance Sheet restatement at 25 August 2018 (unaudited)
25 August IFRS 16 25 August
2018 reported impact 2018 restated
GBPm GBPm GBPm
===================================== =============== ========= ===============
Non-current assets
Goodwill, software and other
intangible assets 6,463 (10) 6,453
Property, plant and equipment 18,808 145 18,953
Right of use assets(1) - 7,878 7,878
Investment property 92 - 92
Investments in joint ventures
and associates 702 (37) 665
Other investments 648 - 648
Trade and other receivables 169 52 221
Loans and advances to customers 7,547 - 7,547
Derivative financial instruments 1,199 - 1,199
Deferred tax assets 137 59 196
35,765 8,087 43,852
===================================== =============== ========= ===============
Current assets
Other investments 42 - 42
Inventories 2,821 - 2,821
Trade and other receivables 1,608 (113) 1,495
Loans and advances to customers 4,846 - 4,846
Derivative financial instruments 194 - 194
Current tax assets - - -
Short-term investments 760 - 760
Cash and cash equivalents 3,243 - 3,243
13,514 (113) 13,401
===================================== =============== ========= ===============
Assets of the disposal group
and non-current assets classified
as held for sale 123 - 123
13,637 (113) 13,524
===================================== =============== ========= ===============
Current liabilities
Trade and other payables (9,749) 240 (9,509)
Borrowings (2,534) 14 (2,520)
Lease liability(2) - (712) (712)
Derivative financial instruments (117) - (117)
Customer deposits and deposits
from banks (8,842) - (8,842)
Current tax liabilities (333) - (333)
Provisions (465) 117 (348)
===================================== =============== ========= ===============
(22,040) (341) (22,381)
===================================== =============== ========= ===============
Net current liabilities (8,403) (454) (8,857)
===================================== =============== ========= ===============
Non-current liabilities
Trade and other payables (399) 19 (380)
Borrowings (5,403) 111 (5,292)
Lease liability(2) - (9,975) (9,975)
Derivative financial instruments (522) - (522)
Customer deposits and deposits
from banks (3,041) - (3,041)
Post-employment benefit obligations (2,574) - (2,574)
Deferred tax liabilities (311) 253 (58)
Provisions (739) 579 (160)
===================================== =============== ========= ===============
(12,989) (9,013) (22,002)
===================================== =============== ========= ===============
Net assets 14,373 (1,380) 12,993
===================================== =============== ========= ===============
Equity
Share capital 490 - 490
Share premium 5,163 - 5,163
Retained earnings and other
reserves 8,741 (1,380) 7,361
Equity attributable to owners
of the parent 14,394 (1,380) 13,014
===================================== =============== ========= ===============
Non-controlling interests (21) - (21)
Total equity 14,373 (1,380) 12,993
===================================== =============== ========= ===============
KPIs and APMs
===================================== =============== ========= ===============
Net debt(3) (3,126) (10,527) (13,653)
Total indebtedness(4) (12,472) (3,325) (15,797)
===================================== =============== ========= ===============
1. The right of use asset of GBP7,878m includes GBP109m assets
held under finance leases, previously included in 'PP&E'.
2. Total lease liabilities of GBP(10,687)m include GBP(125)m
finance lease liabilities previously included in borrowings.
3. Net debt comprises bank and other borrowings, lease
liabilities, net derivative financial instruments, joint venture
loans and other receivables/payables, offset by cash and cash
equivalents and short-term investments. It excludes the net debt of
Tesco Bank (which has lease liabilities of GBP35m).
4. Total indebtedness pre-IFRS 16 comprises Net debt plus the
IAS 19 deficit in the pension schemes (net of associated deferred
tax) plus the present value of future minimum lease payments under
non-cancellable operating leases. Post-IFRS 16, lease liabilities
are included in Net debt, replacing the present value of future
minimum lease payments under non-cancellable operating leases.
Summary Retail Cash Flow Restatement for the 26 weeks ended 25
August 2018 (unaudited)
26 weeks 26 weeks
ended 25 ended
August 2018 IFRS 16 25 August
reported impact 2018 restated
GBPm GBPm GBPm
===================================== ============= ======== ===============
Operating profit before exceptional
items and amortisation of acquired
intangibles 933 188 1,121
===================================== ============= ======== ===============
Less: Tesco Bank operating
profit before exceptional items (89) (1) (90)
===================================== ============= ======== ===============
Retail operating profit from
continuing operations before
exceptional items and amortisation
of acquired intangibles 844 187 1,031
===================================== ============= ======== ===============
Add back: Depreciation and
amortisation 596 339 935
Other reconciling items 1 (9) (8)
Pension deficit contribution (142) - (142)
Underlying (increase) / decrease
in working capital (29) 17 (12)
===================================== ============= ======== ===============
Retail cash generated from
operations before exceptional
items 1,270 534 1,804
===================================== ============= ======== ===============
Exceptional cash items:
Relating to prior years:
- Shareholder Compensation
Scheme payments (27) - (27)
- Utilisation of onerous lease
provisions (32) 32 -
- Restructuring payments (58) - (58)
Relating to current year:
- Restructuring Payments (30) - (30)
===================================== ============= ======== ===============
Retail operating cash flow 1,123 566 1,689
===================================== ============= ======== ===============
Cash capex (459) - (459)
Net interest & tax (274) (286) (560)
Property proceeds 134 - 134
Property purchases - store
buybacks (35) - (35)
Market purchases of shares
(net of proceeds) (139) - (139)
Acquisitions and disposals
and dividends received (693) - (693)
Deduct: Booker acquisition 747 - 747
Repayments of obligations under
leases (7) (280) (287)
===================================== ============= ======== ===============
Retail free cash flow(1) 397 - 397
===================================== ============= ======== ===============
1. Retail cash flow has been redefined to include repayments of
obligations under leases due to IFRS 16. This results in a minor
adjustment of GBP7m, restating reported retail cash flow of GBP404m
to a represented retail free cash flow of GBP397m. There is no
overall impact to cash / cash equivalents at the end of the
period.
Transition Balance Sheet restatement at 24 February 2018
(unaudited)
24 February IFRS 16 24 February
2018 reported impact 2018 restated
GBPm GBPm GBPm
===================================== =============== ========= ===============
Non-current assets
Goodwill, software and other
intangible assets 2,661 - 2,661
Property, plant and equipment 18,521 191 18,712
Right of use assets - 7,527 7,527
Investment property 100 - 100
Investments in joint ventures
and associates 689 (35) 654
Other investments 860 - 860
Trade and other receivables 186 31 217
Loans and advances to customers 6,885 - 6,885
Derivative financial instruments 1,117 - 1,117
Deferred tax assets 116 285 401
31,135 7,999 39,134
===================================== =============== ========= ===============
Current assets
Other investments 68 - 68
Inventories 2,264 - 2,264
Trade and other receivables 1,504 (89) 1,415
Loans and advances to customers 4,637 - 4,637
Derivative financial instruments 27 - 27
Current tax assets 12 - 12
Short-term investments 1,029 - 1,029
Cash and cash equivalents 4,059 - 4,059
13,600 (89) 13,511
===================================== =============== ========= ===============
Assets of the disposal group
and non-current assets classified
as held for sale 149 - 149
13,749 (89) 13,660
===================================== =============== ========= ===============
Current liabilities
Trade and other payables (8,994) 221 (8,773)
Borrowings (1,479) 12 (1,467)
Lease liability - (712) (712)
Derivative financial instruments (69) - (69)
Customer deposits and deposits
from banks (7,812) - (7,812)
Current tax liabilities (335) - (335)
Provisions (544) 128 (416)
===================================== =============== ========= ===============
(19,233) (351) (19,584)
===================================== =============== ========= ===============
Net current liabilities (5,484) (440) (5,924)
===================================== =============== ========= ===============
Non-current liabilities
Trade and other payables (364) - (364)
Borrowings (7,142) 110 (7,032)
Lease liability - (9,560) (9,560)
Derivative financial instruments (594) - (594)
Customer deposits and deposits
from banks (2,972) - (2,972)
Post-employment benefit obligations (3,282) - (3,282)
Deferred tax liabilities (96) 14 (82)
Provisions (721) 592 (129)
===================================== =============== ========= ===============
(15,171) (8,844) (24,015)
===================================== =============== ========= ===============
Net assets 10,480 (1,285) 9,195
===================================== =============== ========= ===============
Equity
Share capital 410 - 410
Share premium 5,107 - 5,107
Retained earnings and other
reserves 4,985 (1,285) 3,700
Equity attributable to owners
of the parent 10,502 (1,285) 9,217
===================================== =============== ========= ===============
Non-controlling interests (22) - (22)
Total equity 10,480 (1,285) 9,195
===================================== =============== ========= ===============
KPIs and APMs
===================================== =============== ========= ===============
Net debt(1) (2,625) (10,114) (12,739)
Total indebtedness(2) (12,284) (3,183) (15,467)
===================================== =============== ========= ===============
1. Net debt comprises bank and other borrowings, lease
liabilities, net derivative financial instruments, joint venture
loans and other receivables/payables, offset by cash and cash
equivalents and short-term investments. It excludes the net debt of
Tesco Bank (which has lease liabilities of GBP36m).
2. Total indebtedness pre-IFRS 16 comprises Net debt plus the
IAS 19 deficit in the pension schemes (net of associated deferred
tax) plus the present value of future minimum lease payments under
non-cancellable operating leases. Post-IFRS 16, lease liabilities
are included in Net debt, replacing the present value of future
minimum lease payments under non-cancellable operating leases.
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END
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