Tesco PLC (LON:TSCO) is introducing IFRS 16, the new financial reporting standard on accounting for leases, for its 2019/20 financial year. As previously indicated, they are adopting the standard fully retrospectively.
The first accounts prepared under IFRS 16 will be the 2019/20 interim results, published in October 2019, followed by the 2019/20 preliminary results, published in April 2020. In order to help investors and analysts update their models in advance of these results, on 15 February 2019 we issued the first half 2018/19 financial statements on a post-IFRS 16 basis and today we are also issuing the 2018/19 full-year financial statements under IFRS 16.
The headline impacts of IFRS 16 on the 2018/19 full-year financial statements can be summarised as follows:
· Group sales and total cash flow are completely unaffected.
· Group operating profit1 increases by £401m to £2,607m as rent is removed and only part-replaced by depreciation.
· Group operating margin2 increases by 63 basis points to 4.08%, including an increase of 64 basis points to 3.62% in the UK & ROI, an increase of 56 basis points to 3.51% in Central Europe, an increase of 68 basis points to 6.55% in Asia and an increase of 19 basis points to 18.14% in Tesco Bank.
· Profit before tax and Diluted EPS3 both decrease, by £(152)m and (1.39)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.
· Whilst the impact of IFRS 16 would normally be expected to be broadly equal between the first and second half of any given year, the weighting can be affected by one-off items such as foreign exchange movements and gains on termination of leases. In the 2018/19 year, a number of one-off credits of this nature were recognised in the second half.
· Net assets reduce by £(1.3)bn to £13.5bn, as a ‘new’ lease liability of £(10.4)bn and ‘new’ right of use asset of £7.7bn are recognised and onerous lease provisions and other working capital balances are derecognised.
· Total indebtedness increases by £(3.3)bn to £(15.5)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 2018/19 financial statements can be found in Note 1 of this press release.
Additional information about the implementation of IFRS 16 and the impact of IFRS 16 on the first half 2018/19 financial statements were outlined in the Group’s ‘Introducing IFRS 16’ analyst and investor briefing which was held on 15 February 2019. The relevant release, presentation and webcast of the briefing are available on www.tescoplc.com/investors/reports-results-and-presentations.
As at 31st December 2018, Blackrock Income Growth and Investment Trust PLC has 3.5% of their portfolio held in Tesco PLC.
