Preliminary Results 2020/21 Part 1

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RNS Number : 3719V

Tesco PLC

14 April 2021

INCREDIBLE TEAM EFFORT IN EXCEPTIONAL YEAR - WELL-PLACED TO BUILD ON MOMENTUM

On a continuing operations basis ¹	2020/21	2019/20¹	Change at actual rates	Change at constant rates
Headline measures² (on a 52-week comparable basis):
Group sales (exc. fuel)³	£53.4bn	£49.9bn	7.1%	7.0%
- UK & ROI	£48.8bn	£44.9bn	8.8%	8.6%
- Central Europe	£3.9bn	£4.0bn	(2.1)%	(0.6)%
- Tesco Bank	£0.7bn	£1.1bn	(31.2)%	(31.2)%
Group operating profit before exceptional items and amortisation of acquired intangibles⁴	£1,815m	£2,525m	(28.1)%	(28.3)%
- Retail	£1,990m	£2,332m	(14.7)%	(14.8)%
- Tesco Bank	£(175)m	£193m	n/m	n/m
Retail free cash flow¹ Net debt^1,5	£1,187m £(12.0)bn	£1,690m £(12.3)bn	(29.8)% down 2.8%
Diluted EPS before exceptional and other items (adjusted for share consolidation)⁶	11.94p	18.60p	(35.8)%
Dividend per share	9.15p	9.15p	-
Statutory measures (on a 53-week prior year basis):
Revenue (inc. fuel)	£57.9bn	£58.1bn	(0.4)%
Operating profit	£1,736m	£2,206m	(21.3)%
Profit before tax	£825m	£1,028m	(19.7)%
Diluted EPS	7.54p	7.54p	-

In December, we made a decision to repay business rates relief. The full cost of business rates is therefore included as usual in the relevant measures above (i.e. this repayment has not been treated as an exceptional item).

Key headlines

· Significant role supporting customers, colleagues, suppliers and communities throughout COVID-19 pandemic

· Sales exceptionally strong; growing UK market share in the year and gaining customers from all key competitors⁷

· Highest value perception in a decade; Aldi Price Match launched in March 2020 and then extended to >500 lines

· Clubcard Prices launched in September and now extended to over 3,000 products; >two million more Clubcard app users

· UK online sales £6.3bn⁸, up 77%; capacity > doubled to 1.5m slots/wk; West Bromwich UFC on track, UFC #2 opens in May

· Concluded £8.2bn sale of Asia business⁹; £5.0bn returned to shareholders + £2.5bn one-off pension contribution

· GHG emissions reduced 54% vs 2015 baseline; removed 1bn items of plastic; redistributed 82% of UK surplus food (+5% YoY)

· Well set for the current year; strong improvement in profitability expected whilst trading conditions likely to remain volatile

Financial highlights

· Group like-for-like sales growth¹⁰ +6.3% including UK +7.7%

· Total retail operating profit before exceptional items and amortisation of acquired intangibles⁴ £1,990m, down (14.7)%

- UK & ROI operating profit £1,866m - after £(892)m UK COVID-19 costs (incl. third UK colleague bonus announced today)
and after forgoing £535m business rates relief

- represents 11.4% growth year-on-year prior to forgoing business rates relief

- Central Europe operating profit £124m, impacted by COVID-19 trading restrictions and Hungarian retail sales tax

· Bank operating loss £(175)m, in line with guidance; £(295)m goodwill impairment driven mainly by increased discount rate

· Retail free cash flow £1,187m; down year-on-year reflecting lower retail profit and last year's £277m sale of Gain Land

· Net debt down £0.3bn to £(12.0)bn; Total indebtedness down £1.9bn to £(13.0)bn (TIR: 3.6x, impacted by COVID-19)

· Diluted adjusted EPS⁶ 11.94p down (35.8)% reflecting lower profits

· Proposed final dividend of 5.95pps to take full year dividend to 9.15pps - in line with last year and an exception to our policy, reflecting the importance the Board places on dividends paid to shareholders and its confidence in future cash flows

Ken Murphy, Chief Executive:

"Tesco has shown incredible strength and agility throughout the pandemic. By putting our customers and colleagues first we have built a stronger business. I'd like to say a huge thank you to the entire team for rising so selflessly to every challenge they've faced. Their efforts have been truly heroic.

While the pandemic is not yet over, we're well-placed to build on the momentum in our business. We have strengthened our brand, increased customer satisfaction and improved value perception. We have doubled the size of our online business and through Clubcard, we're building a digital customer platform. Sustainability is now an integral part of our business strategy and we're doubling down on our efforts to reach net zero.

Our decision to protect and hold the dividend flat for this financial year demonstrates our commitment to shareholders. We believe we can create significant further value for them and every stakeholder in our business by continuing to focus on value, loyalty and convenience for customers, underpinned by strong capital discipline."

Headline Group results

Key segmental results:

	Sales²	YoY 52 week change (actual rates)	YoY 52 week change (constant rates)	Like-for-like sales change¹⁰	Operating Profit/(Loss) before exceptional items and amortisation of acquired intangibles	YoY 52 week change (actual rates)	YoY 52 week change (constant rates)
UK & ROI	£48,848m	8.8%	8.6%	6.8%	£1,866m 3.51% margin	(13.5)% (64)bps	(13.7)% (65)bps
- UK	£39,434m	8.0%	8.0%	7.7%
- ROI	£2,678m	16.9%	13.7%	14.0%
- Booker	£6,736m	10.5%	10.5%	(0.8)%
Central Europe	£3,862m	(2.1)%	(0.6)%	(0.4)%	£124m 3.11% margin	(29.5)% (116)bps	(29.0)% (117)bps
Retail	£52,710m	7.9%	7.9%	6.3%	£1,990m 3.48% margin	(14.7)% (69)bps	(14.8)% (69)bps
Tesco Bank	£735m	(31.2)%	(31.2)%	-	£(175)m n/m	(190.7)% n/m	(190.7)% n/m
Group	£53,445m	7.1%	7.0%	6.3%	£1,815m 3.14% margin	(28.1)% (128)bps	(28.3)% (129)bps

A full Group income statement can be found on page 29. As we reported statutory numbers on a 53-week basis for the 2019/20 financial year (rather than our usual 52-week basis) we have provided comparators on both a 52-week and 53-week basis throughout these results where relevant.

52 weeks ended 27 February 2021 On a continuing operations basis	2020/21	2019/20¹ 52 week basis	2019/20¹ 53 week basis	Year-on-year 52 week change (actual rates)	Year-on-year 52 week change (constant rates)	Year-on-year 53 week change (actual rates)
Group sales (exc. VAT, exc. fuel)³	£53,445m	£49,945m	£50,788m	7.1%	7.0%	5.2%
Fuel	£4,442m	£7,163m	£7,303m	(38.0)%	(38.0)%	(39.2)%
Revenue (exc. VAT, inc. fuel)	£57,887m	£57,108m	£58,091m	1.4%	1.3%	(0.4)%

Group operating profit before exceptional items and amortisation of acquired intangibles⁴	£1,815m	£2,525m	£2,571m	(28.1)%	(28.3)%	(29.4)%
Include/(deduct) exceptional items and amortisation of acquired intangibles	£(79)m	£(331)m	£(365)m
Group statutory operating profit	£1,736m	n/a	£2,206m	n/a		(21.3)%

Adjusted Group profit before tax¹¹	£1,161m	£1,832m	£1,869m	(36.6)%

Group statutory profit before tax	£825m	n/a	£1,028m	n/a		(19.7)%

Diluted EPS (adjusted for share consolidation)⁶	11.94p	18.60p	18.98p	(35.8)%		(37.1)%
Statutory diluted EPS	7.54p	n/a	7.54p	n/a		-
Statutory basic EPS	7.56p	n/a	7.60p	n/a		(0.5)%

Dividend per share	9.15p	n/a	9.15p	n/a		-

Capex¹²	£1.0bn	£0.9bn	£0.9bn
Retail free cash flow⁵	£1.2bn	£1.7bn	£1.5bn
Total indebtedness^1,5:	£(13.0)bn	£(14.7)bn	£(14.9)bn
Underlying net debt	£(3.4)bn	£(2.6)bn	£(2.8)bn
Lease liabilities	£(8.5)bn	£(9.5)bn	£(9.5)bn
Pension deficit IAS 19 basis	£(1.0)bn	£(2.6)bn	£(2.6)bn

Notes

1. All measures apart from net debt are shown on a continuing operations basis. Prior year comparatives are also shown on a continuing operations basis. Net debt includes discontinued operations until the point of sale. Further details on discontinued operations can be found in Note 7, starting on page 57.

2. The Group has defined and outlined the purpose of its alternative performance measures, including its headline measures, in the Glossary starting on page 125.

3. Group sales exclude VAT and fuel. Sales change shown on a comparable days basis for Central Europe.

4. Excludes amortisation of acquired intangibles and excludes exceptional items by virtue of their size and nature in order to reflect management's view of underlying performance.

5. Net debt, total indebtedness and retail free cash flow exclude Tesco Bank. Net debt also includes lease liabilities following the adoption of IFRS 16.

6. Diluted EPS before exceptional and other items (adjusted for share consolidation) is provided to aid comparability, as the sale of our businesses in Thailand and Malaysia and the share consolidation and special dividend which followed distort our financial result in the year. As such, this metric is presented on a basis other than in accordance with IAS 33 and captures the full impact of the share consolidation as if it had taken place at the start of the 2019/20 financial year. Please see Note 9 on page 59 for a reconciliation to diluted adjusted EPS.

7. Source: Kantar. Net switching data for 12 w/e 21 February.

8. Online sales are shown including VAT.

9. $10.6bn enterprise value, on a cash and debt free basis, presented in GBP using a rate of USD1.29:£1.00. This is based on the average daily closing rate from Monday 2 to Friday 6 March 2020.

10. Like-for-like is a measure of growth from stores that have been open for at least a year and online sales (at constant exchange rates).

11. 'Adjusted Group PBT' measures exclude exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments.

12. Capex is shown excluding property buybacks. Statutory capital expenditure (including property buybacks) for the 52 weeks ended 27 February 2021 was £1.8bn (LY £2.0bn).

Creating value for our key stakeholders

Customers

· Quickly introduced COVID-19 safety measures; market-leading UK customer safety rating of c.90%

· Doubled UK online capacity in five weeks; supporting over 852,000 vulnerable customers with priority slots

· Strengthened our relative price position including extension of 'Aldi Price Match' to over 500 lines in July

· Introduced Clubcard Prices in September; driving more than 2 million more active users of Clubcard app

· Strengthened value proposition, with removal of range duplication and 15% reduction in promotional participation

· Launched new commitment to increase sales of healthy products¹ to 65% by 2025

· Provided >£60m food to communities; 82% of surplus food safe for consumption redistributed

· Expanded food donation programme to offer free fruit and veg to 500,000 Healthy Start families

· Launched plan to roll out soft plastic recycling points to all large stores, the first UK network of its kind

Colleagues

· Welcomed 49,600 new temporary colleagues; around 20,000 of these roles becoming permanent

· Ensured full pay from day one for all colleagues sick or self-isolating with COVID-19

· Additional bonus announced today for front-line retail colleagues in UK & ROI and Central Europe; follows previous

recognition bonuses paid through the year

· 26,000 vulnerable colleagues supported with 12 weeks full pay as part of initial COVID-19 wave

· Created 1,000 work placements for young people as a leading supporter of the 'Kickstart' programme

· Two mental wellbeing tools, Headspace and SilverCloud, made available for free to all our 300,000 UK colleagues

· Launched first Business Diversity Internships in September

Supplier partners

· Collaborated across supply base to maintain availability and adapt to exceptional shift in demand due to COVID-19

· Moved to immediate payment of invoices for all small suppliers; now extended until end February 2022

· Group supplier viewpoint reached highest ever score of 85.0% (+5.4% pts YoY)

· Maintained strong availability during the Brexit transition through working closely with suppliers

· Cut 200,000 tonnes of cumulative food waste from combined operations across the Group

· Booker retail offer adapted to meet changing demand; supported catering customers move to delivery model

· Worked with suppliers to achieve target of removing 1 billion pieces of plastic from UK business

Shareholders

· £8.2bn sale of Thailand and Malaysia businesses completed in December; proceeds used to return £5.0bn to shareholders via a special dividend and make one-off £2.5bn contribution to the pension scheme

· First retailer to establish a sustainability-linked bond, issuing €750m at an interest rate of 0.375% in January 2021

· First European food retailer to report against SASB; brought forward UK net zero emissions goal by 15 years to 2035

· Polish business sale completed in March 2021; expected total cumulative proceeds inc. residual properties > £0.5bn

· Bought into full ownership a further 19 stores and 2 distribution centres; UK & ROI freehold ownership now 57%

1. Tesco tracks the healthiness of its products and ranges using the Tesco Health Score, which is a measure based on the UK Government's nutrient profiling model. This model reviews a product's fat, salt and sugar content as well as the fibre, fruit and vegetable content. https://www.gov.uk/government/publications/the-nutrient-profiling-model

Looking ahead

We will continue to be guided by our four key priorities in response to the COVID-19 crisis: providing food for all, safety for everyone, supporting our colleagues and supporting our communities. We also remain committed to delivering great value to help customers in challenging times.

Whilst we expect some of the additional sales volumes we have gained this year in our core UK market to fall away as COVID-19 restrictions ease, we expect a strong recovery in profitability and retail free cash flow as the majority of the additional costs incurred as a result of the pandemic in the 2020/21 financial year will not be repeated.

Whilst the greater than usual level of uncertainty around sales volumes, mix and channel shift makes it difficult to be precise, our best estimate at this stage is for retail operating profit to recover to a similar level as in the 2019/20 financial year (on a continuing operations basis) - the year prior to COVID-19 having any impact on performance.

We anticipate a return to profitability in Tesco Bank in the 2021/22 financial year. The pace and scale of recovery in profitability is highly dependent on the economic outlook, which remains uncertain.

Imran Nawaz takes over as Chief Financial Officer on 1 May 2021, following Alan Stewart's retirement on 30 April 2021. We remain committed to maintaining capital discipline and returning excess capital to shareholders.

We will report our 1Q Trading Statement on Friday 18 June 2021.

Financial results

The results of our businesses in Thailand and Malaysia, and of our business in Poland, have been classified as discontinued operations. The sale of these businesses completed on 18 December 2020 and 16 March 2021 respectively.

Sales:

On a continuing operations basis	UK & ROI	Central Europe	Retail	Tesco Bank	Group
Sales	£48,848m	£3,862m	£52,710m	£735m	£53,445m
(exc. VAT, exc. fuel)	£48,848m	£3,862m	£52,710m	£735m	£53,445m
change at constant exchange rates %	8.6%	(0.6)%	7.9%	(31.2)%	7.0%
change at actual exchange rates %	8.8%	(2.1)%	7.9%	(31.2)%	7.1%
Like-for-like sales (exc. VAT, exc. fuel)	6.8%	(0.4)%	6.3%	n/a	6.3%
Statutory revenue (exc. VAT, inc. fuel)	£53,170m	£3,982m	£57,152m	£735m	£57,887m
Includes: Fuel	£4,322m	£120m	£4,442m	-	£4,442m

1. UK & ROI consists of Tesco UK, ROI and Booker.

2. Central Europe consists of Czech Republic, Hungary and Slovakia. Poland is now reported as a discontinued operation.

3. Sales change shown on a comparable days basis for Central Europe; based on statutory 52 week accounting dates, Group sales grew by 7.0% at both constant and actual exchange rates.

Group sales grew by 7.1% at actual rates, including a 0.1% foreign exchange translation benefit. The COVID-19 crisis had a profound impact on the way our customers shopped in the year, affecting all areas of our business.

In the UK and the Republic of Ireland (ROI), total sales grew by 8.8% as we saw a shift towards 'in-home' consumption. Sales in the first quarter grew by 9.4% due to an initial period of stockpiling at the start of the first national lockdown, before stabilising in the second and third quarters as the 'out of home' market partially re-opened. As the UK entered a second and third national lockdown, sales re-accelerated into the fourth quarter and we saw sustained elevated sales throughout this period. Demand was particularly strong in fresh food, grocery and beers, wines and spirits categories across the year.

In response to the significant demand peak early in the year, we worked with our supplier partners to simplify our offer, prioritising availability in essential products and categories. We reduced promotional participation from 36% to 21% through the year as we focused on every day great value for customers.

We gained market share in the year and gained customers from all key competitors. Our relative performance was particularly strong in the second half, including a market leading performance every week over the Christmas period.

We further strengthened and simplified our value proposition, including launching the 'Aldi Price Match' campaign in March 2020 before extending it to over 500 products, including brands. Our value perception accelerated in the second half, reaching its highest level in a decade, up 480 basis points by the end of the year.

We extended Clubcard Prices from September, initially offering c.2,000 exclusive deals to our Clubcard customers. In March 2021, we increased the number of deals available to customers to more than 3,000, now including general merchandise promotions. Since September, the number of customers using their Clubcard via an app has doubled to over 5 million and Clubcard sales penetration has increased by more than 10 percentage points to around 80%. Although we haven't focused on expanding our Clubcard Plus subscription offer during the COVID-19 pandemic, we continue to see an increase in uptake and basket uplifts are significantly ahead of our expectations.

Sales grew in every format and channel. Like-for-like sales in large stores grew by 1.5%, with bigger baskets but fewer visits as customers sought to do all of their shopping in one trip. Like-for-like sales in our Express and One Stop stores grew by 3.9% with particularly strong growth in our neighbourhood stores as customers favoured shopping closer to home.

In response to the unprecedented increase in customer demand for online groceries, we rapidly expanded our online business, more than doubling capacity to 1.5 million slots per week over a five-week period. Sales grew by 77% in the year - an additional £2.8bn - taking annual sales to £6.3bn (inc VAT). Online sales participation doubled to 15% for the full year, reaching a peak of 18% during the fourth quarter. Home deliveries accounted for 79% of online orders, with click & collect participation increasing from 11% at the start of the year to 25% by the end of the year. Our first UFC (Urban Fulfilment Centre) opened in the year in West Bromwich Extra. Our second UFC in Lakeside Extra is now due to open next month having been delayed several months by the pandemic and a further four sites are due to open within the next twelve months. These UFCs will enable us to provide access to more delivery slots for customers with an increased rate of picking - a scalable, efficient option to fulfil ongoing online demand.

Booker sales grew by 10.5%, due to the inclusion of sales from Best Food Logistics which was acquired at the beginning of the financial year. Sales to retail customers were strong, increasing by 18.5%, as we expanded their grocery ranges in response to demand from customers aiming to shop closer to home. In catering, sales declined by (40.8)% due to the closure of the hospitality and leisure sector for much of the year, with monthly performance strongly correlated to the severity of the UK COVID-19 restrictions. We supported our catering customers throughout this period of change, offering a full range of food and consumables, leading to a significantly increased market share at the end of the year.

In ROI, sales grew by 13.7% at constant rates driven by particularly strong growth in our large stores. Our online business remains the clear market leader and we increased capacity by over 60% since the start of the year in response to customer demand, with online sales participation increasing from 6% to 9%. By the end of the year, our customer NPS score was at its highest level in over five years as we saw significant improvements in both value and quality perception.

In Central Europe customer behaviour was different to that seen in the UK & ROI markets and trading restrictions were highly variable. The smaller 'out of home' market in Central Europe meant we did not see as significant a shift to 'in-home' consumption. Sales declined by (0.6)% at constant rates as customers were encouraged to shop locally and trading restrictions in general merchandise led to a reduction in footfall in our larger, destination stores. Our online business and core food ranges within supermarkets performed strongly throughout the year. Trading regulations are expected to remain challenging into the current year.

Group statutory revenue of £57.9bn was 1.4% higher year-on-year including fuel sales of £4.4bn (LY: £7.2bn) which declined by (38.0)% year-on-year. Customers travelled significantly less due to COVID-19 lockdown restrictions with UK fuel sales declining by up to (70)% in April before partially recovering to a (33)% decline in the second half.

Further information on sales performance is included in the supplementary information starting on page 122 of this statement.

Operating profit before exceptional items and amortisation of acquired intangibles:

On a continuing operations basis	UK & ROI	Central Europe	Retail	Tesco Bank	Group
Operating profit / (loss) before exceptional items and amortisation of acquired intangibles	£1,866m	£124m	£1,990m	£(175)m	£1,815m
change at constant exchange rates %	(13.7)%	(29.0)%	(14.8)%	n/m	(28.3)%
change at actual exchange rates %	(13.5)%	(29.5)%	(14.7)%	n/m	(28.1)%
Operating profit margin before exceptional items and amortisation of acquired intangibles	3.5%	3.1%	3.5%	(23.8)%	3.1%
change at constant exchange rates (basis points)	(65)bps	(117)bps	(69)bps	n/m	(129)bps
change at actual exchange rates (basis points)	(64)bps	(116)bps	(69)bps	n/m	(128)bps
Statutory operating profit / (loss)	£2,079m	£127m	£2,206m	£(470)m	£1,736m

Group operating profit before exceptional items and amortisation of acquired intangibles was £1,815m, down (28.1)% at actual rates. Statutory operating profit of £1,736m includes the impact of exceptional items and amortisation of acquired intangibles, which are described in more detail below and in Note 4 on page 52 of this statement.

In December, we announced our decision to forgo £535m of UK Government business rates relief relating to the 2020/21 financial year in respect of the COVID-19 pandemic. As a result, business rates are included as usual in operating profit before exceptional items and amortisation of acquired intangibles.

Retail operating profit before exceptional items and amortisation of acquired intangibles was £1,990m, down (14.7)% year-on-year, primarily driven by costs relating to our response to the COVID-19 pandemic, partially offset by higher sales volumes.

UK & ROI profit was £1,866m, down (13.5)% year-on-year. The COVID-19 pandemic had far-reaching impacts on our operations, and we incurred significant costs in safeguarding our customers and colleagues, primarily through higher payroll costs. All colleagues who were off-work due to COVID-19 and those who were required to shield or self-isolate received full-pay from their first day of absence. In recognition of the efforts of our store and distribution colleagues, we awarded three bonuses throughout the year to thank them for their exceptional contribution. We also incurred costs for safety consumables, protective equipment and additional distribution, and the temporary closure of hospitality outlets impacted our retail partners who operate from our stores, leading to a reduction in rental income. In total, UK COVID-19 costs led to a £(892)m reduction in operating profit, which was partially offset by the contribution from higher sales. In the current year, whilst we anticipate that the majority of these costs will fall away, a certain proportion are likely to be required due to any ongoing absence and whilst we operate within national lockdown restrictions. Our current estimate - based on the latest UK Government roadmap for easing restrictions - is for around a quarter of the 2020/21 costs to be repeated. We will continue to forgo any business rates relief available.

Booker profitability was significantly impacted by the decline in catering sales, partially offset by a stronger contribution from our retail business and robust cost control. The recovery of catering performance remains uncertain and is likely to be strongly correlated to the re-opening of the hospitality and leisure sector. As catering demand fell away immediately following the completion of the Best Food Logistics acquisition, colleagues there were redeployed to support Booker's retail customer-focused business and the Tesco grocery online business.

Central European operating profit before exceptional items reduced by (29.5)% year-on-year, to £124m, reflecting a challenging trading environment whilst operating under COVID-19 restrictions, which particularly impacted our most significant large stores channel. We incurred a £(25)m charge in the year relating to a retail sales tax in Hungary which was introduced in May. As in the UK & ROI, our response to the COVID-19 pandemic in the region resulted in higher costs due primarily to colleague absence, whilst mall income was also impacted due to temporary closures. These impacts were partially offset by cost savings from our ongoing simplification efforts in the region.

Tesco Bank made an operating loss before exceptional items of £(175)m, reflecting both a decline in banking activity and an increase in the provision for potential bad debts. Please refer to page 12 of this statement for a fuller description of Tesco Bank performance.

Further information on operating profit performance is included in Note 2, starting on page 45 of this statement.

Exceptional items and amortisation of acquired intangibles in statutory operating profit:

On a continuing operations basis	This Year	Last year (52 weeks)	Last year (53 weeks)
Impairment charge on Tesco Bank goodwill	£(295)m	-	-
Net impairment reversal of non-current assets	£156m	£64m	£64m
Acquisition of property joint venture	£134m	£(136)m	£(136)m
UK - ATM business rates	£105m	-	-
Litigation costs	£(93)m	-	-
Property transactions	£26m	£22m	£33m
Booker integration costs	£(25)m	£(23)m	£(23)m
GMP Equalisation	£(7)m	-	-
Employee share scheme	£(4)m	-	-
Net restructuring and redundancy costs	-	£(64)m	£(108)m
Closure of Tesco Bank current accounts to new customers	-	£(56)m	£(56)m
Impairment of investment in India joint venture	-	£(47)m	£(47)m
Provision for customer redress	-	£(45)m	£(45)m
Disposal of Gain Land associate	-	£37m	£37m
Tesco Bank mortgage book disposal	-	£(5)m	£(5)m
Total exceptional items in statutory operating profit	£(3)m	£(253)m	£(286)m
Amortisation of acquired intangible assets	£(76)m	£(78)m	£(79)m
Total exceptional items and amortisation of acquired intangibles in statutory operating profit	£(79)m	£(331)m	£(365)m

Exceptional items are excluded from our headline performance measures by virtue of their size and nature in order to reflect management's view of the underlying performance of the Group. On a continuing operations basis, total exceptional items resulted in a charge of £(3)m, compared to £(253)m last year.

We recognised an exceptional charge of £(295)m relating to Tesco Bank goodwill due mainly to an increased discount rate as well as an anticipated reduction in future cash flows as a result of the COVID-19 pandemic.

The exceptional credit of £156m relating to net impairment reversal of non-current assets was driven by a reduction in discount rates across our retail businesses.

The acquisition of our partner's 50% stake in The Tesco Property (No. 2) Limited Partnership in September 2020 brought into full ownership twelve stores and two distribution centres. The exceptional credit of £134m represents the net effect of the de-recognition of the previously held lease liabilities and right of use assets, and the re-measurement of the acquired assets. Further detail can be found in Note 33 on page 106 of this statement.

A credit of £105m relates to the refund of historical ATM business rates payments after a Supreme Court ruling in May determined that retailers should not be assessed for rates on ATMs installed in or outside stores. We collected £90m of these cash refunds in the year, with the balance remaining to be collected in the 2021/22 financial year.

A charge of £(93)m relates to the settlement of two shareholder litigation claims during the period, with associated costs.

We have incurred a further £(25)m exceptional charge related to Booker integration costs, bringing costs to date to £(61)m, which is in line with our estimate of total integration costs over a three year period of between £(50)m to £(75)m. We do not expect to incur any further exceptional integration costs.

Further detail on exceptional items can be found in Note 4, starting on page 52 of this statement.

Amortisation of acquired intangible assets is excluded from our headline performance measures. We incurred a charge of £(76)m in the period, which primarily relates to our merger with Booker in March 2018, which resulted in the recognition of goodwill of £3,093m and £755m intangible assets.

Joint ventures and associates:

On a continuing operations basis	This year	Last year (52 weeks)	Last year (53 weeks)
Share of post-tax profits/(losses) from JVs and associates before exceptional items	£26m	-	-
Exceptional items	-	£(8)m	£(8)m
Share of post-tax profits from JVs and associates	£26m	£(8)m	£(8)m

Our share of post-tax profits from joint ventures and associates before exceptional items was £26m. This includes profits from UK property joint ventures, in addition to an increased contribution from Tesco Underwriting Ltd. The year-on-year improvement also reflects the benefit of the removal of our loss-making associate in China, which we disposed of at the end of last year.

Finance income and finance costs:

On a continuing operations basis	This year	Last year (52 weeks)	Last year (53 weeks)
Net interest on medium term notes, loans and bonds	£(218)m	£(209)m	£(212)m
Other interest receivable and similar income	£15m	£20m	£20m
Other finance charges and interest payable	£(31)m	£(24)m	£(24)m
Finance charges payable on lease liabilities	£(446)m	£(480)m	£(486)m
Net finance cost before exceptional items, net pension finance costs and fair value remeasurements of financial instruments	£(680)m	£(693)m	£(702)m
Fair value remeasurements of financial instruments	£(214)m	£(228)m	£(246)m
Net pension finance costs	£(43)m	£(71)m	£(71)m
Net finance costs before exceptional items	£(937)m	£(992)m	£(1,019)m
Exceptional items: - Fair value remeasurement on restructuring derivative financial instruments	-	£(180)m	£(180)m
- Gain on Tesco Bank mortgage disposal	-	£29m	£29m
Net finance costs	£(937)m	£(1,143)m	£(1,170)m

Net finance costs before exceptional items, net pension finance costs and fair value remeasurements of financial instruments were £(680)m, slightly down on last year.

Finance charges payable on lease liabilities reduced year-on-year, primarily due to ongoing lease utilisation and the buyback of property, comprising a further seven UK stores and The Tesco Property (No. 2) Limited Partnership in the year.

Net interest on medium term notes, loans and bonds was £(218)m, £(9)m higher year-on-year due to the inclusion of interest payments on the debt we acquired with The Tesco Atrato Limited Partnership in September 2019 and The Tesco Property (No. 2) Limited Partnership in September 2020. This more than offset a reduction in interest payable following debt maturities, bond tenders and new issues at a significantly lower rate of interest.

A fair value remeasurement charge of £(214)m primarily related to premiums paid on the buyback of bonds and the mark-to-market movement on inflation-linked swaps, driven by falling future inflation rates. These swaps reduce the impact of future inflation on the Group's cash flow in relation to historical sale and leaseback property transactions.

Net pension finance costs of £(43)m decreased by £28m year -on-year, including a benefit from the reduction in the pension deficit following the £2.5bn one-off pension contribution. Net pension finance costs for the current year are expected to be in the region of £(23)m.

Further detail on finance income and costs can be found in Note 5 on page 53, as well as further detail on the exceptional items in Note 4 on page 52.

Group tax:

On a continuing operations basis	This year	Last year (52 weeks)	Last year (53 weeks)
Tax on profit before exceptional items and amortisation of acquired intangibles	£(200)m	£(339)m	£(342)m
Tax on exceptional items and amortisation of acquired intangibles¹	£96m	£45m	£52m
Tax on profit	£(104)m	£(294)m	£(290)m

1. Current year includes tax credits of £106m in relation to uncertain tax positions and £20m in relation to rolled over gains and capital losses on property disposals classified as exceptional. Please see Note 4 on page 52.

Tax on Group profit before exceptional items and amortisation of acquired intangibles was £(200)m, £139m lower than last year primarily due to lower retail operating profits and a tax credit related to Tesco Bank operating losses.

The effective tax rate on profit before exceptional items and amortisation of acquired intangibles was 22.1%, higher than the UK statutory rate, primarily due to depreciation of assets that do not qualify for tax relief. We expect an effective tax rate for the 2021/22 financial year of c.23%. Following the UK Government's budget announcement in March, we now expect the effective tax rate to increase to around 26% in the medium term due to an increase in the UK corporation tax rate. Further detail on Group tax can be found in Note 6 on page 54.

Total Group cash tax paid in the year was £(170)m on a continuing operations basis, which included £(105)m of tax paid in the UK. Tax paid in the year was £118m lower than in the prior year, primarily due to a tax deduction in relation to the £2.5 billion one-off pension contribution and a decline in Tesco Bank operating profit.

Earnings per share:

On a continuing operations basis	This year	Last year (52 weeks)	Last year (53 weeks)
Diluted EPS pre-exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments adjusted for share consolidation¹	11.94p	18.60p	18.98p
Statutory diluted earnings per share	7.54p	n/a	7.54p
Statutory basic earnings per share	7.56p	n/a	7.60p

1. Diluted EPS before exceptional and other items (adjusted for share consolidation) is provided to aid comparability, as the sale of our businesses in Thailand and Malaysia and the share consolidation and special dividend which followed distort our financial result in the year. As such, this metric is presented on a basis other than in accordance with IAS 33 and captures the full impact of the share consolidation as if it had taken place at the start of the 2019/20 financial year. Please see Note 9 on page 59 for a reconciliation to diluted adjusted EPS.

Our adjusted diluted EPS metric reflects the post-consolidation share base as if it had been in place from the start of the 2019/20 financial year. On this basis, adjusted diluted EPS was 11.94p (LY: 18.60p), (35.8)% lower year-on-year, due to Tesco Bank operating losses and lower retail operating profits due to COVID-19 impacts.

Statutory basic earnings per share from continuing operations was 7.56p, (0.5)% lower year-on-year, due to a decline in operating profits which was offset by lower exceptional charges and a lower tax charge.

Discontinued operations:

The performance of our businesses in Thailand, Malaysia and Poland are classified as discontinued operations and has been excluded from our headline performance measures. Operating profit before exceptional items for discontinued operations was £432m.

In December, we completed the sale of our businesses in Thailand and Malaysia to a combination of CP Group entities for an enterprise value of £8.2 billion and net cash proceeds before tax and other costs of £8.0 billion. In March 2021, we announced the completion of the sale of our business in Poland to Salling Group A/S.

Total exceptional items related to discontinued operations were £(147)m in the period, comprising a provision for a legal claim of £(88)m relating to the sale of our Homeplus business in Korea in 2015 and a £(43)m charge relating to net impairment losses on non-current assets in our business in Poland.

Further information on discontinued operations is included in Note 7, starting on page 57 of this statement.

Dividend:

In February, we returned £5.0 billion to shareholders by means of a special dividend, following the sale of our businesses in Thailand and Malaysia.

We propose to pay a final dividend of 5.95 pence per ordinary share, taking the full-year dividend to 9.15 pence per ordinary share, including the payment of an interim dividend of 3.20 pence per ordinary share in November 2020. The proposed full-year dividend of 9.15p reflects the importance the Board places on dividends paid to shareholders, the strength, resilience and momentum of the business in a particularly challenging year and our confidence in future cash flows. This is an exception to our policy of a pay-out ratio of 50% of earnings which would have implied a full year dividend of 5.97p.

The proposed final dividend was approved by the Board of Directors on 13 April 2021 and is subject to the approval of shareholders at this year's Annual General Meeting. The final dividend will be paid on 2 July 2021 to shareholders who are on the register of members at close of business on 21 May 2021 (the Record Date). Shareholders may elect to reinvest their dividend in the Dividend Reinvestment Plan (DRIP). The last date for receipt of DRIP elections and revocations will be 11 June 2021.

Summary of total indebtedness:

	Feb-21	Feb-20 (53-week basis)	YoY change	Of which: relating to Asia disposal	Of which: underlying movement
Underlying net debt (excl. Tesco Bank)	£(3,449)m	£(2,765)m	£(684)m	£(240)m	£(444)m
Lease liabilities	£(8,506)m	£(9,533)m	£1,027m	£765m	£262m
Pension deficit, IAS 19 basis (post-tax)	£(1,004)m	£(2,573)m	£1,569m	£2,052m	£(483)m
Total indebtedness	£(12,959)m	£(14,871)m	£1,912m	£2,577m	£(665)m

Total indebtedness was £(12,959)m, down £1.9bn year-on-year primarily driven by the reduction in our pension deficit following the £2.5bn one-off contribution made following the sale of our businesses in Asia. This reduction was partly offset by an increase in the underlying IAS 19 pension deficit.

Including the one-off pension contribution, the sale of our businesses in Thailand and Malaysia reduced total indebtedness by £2,577m, including a net benefit of £525m from the de-recognition of cash and lease liability balances. In the table above we have shown this impact separately, to provide greater clarity into the other movements in total indebtedness in the year.

Other indebtedness movements totalled £(665)m year-on-year, reflecting an increase in the IAS 19 pension deficit of £(483)m principally due to underlying market movements in gilts and corporate bonds that have negatively impacted scheme assets but caused smaller offsetting reduction in IAS 19 pension liabilities. The IAS 19 pension deficit does not drive contributions made to the pension scheme. The acquisition of our partner's stake in The Tesco Property (No. 2) Limited Partnership also increased indebtedness, with net debt increasing by £(453)m partly offset by lease liabilities reducing by £254m.

Our reported total indebtedness this year includes £134m of lease liabilities and £7m of underlying net debt relating to our business in Poland.

We have retained a strong cash position with a total of £2.1bn of cash liquidity available at the end of the year. In January 2021, we issued a €750m, 8.5 year bond at an interest rate of 0.375%, linked to greenhouse gas emissions. This was the first bond issued by a retailer to be linked to sustainability targets. We re-financed our committed facilities in October at £2.5bn for a further three years, securing access to additional liquidity. The rate of interest payable on utilisation of these facilities will be linked to the achievement of three ESG targets.

Our total indebtedness ratio was 3.6 times, compared to 3.1 times at the prior year-end, primarily due to a reduction in retail EBITDA driven by COVID-19 related costs. We expect this to improve strongly in the current year as profits recover. The sale of our businesses in Thailand and Malaysia had a net neutral impact on the total indebtedness ratio, as the benefit of the one-off pension contribution and de-recognition of lease liabilities and net debt in those businesses was offset by reduced earnings. Fixed charge cover decreased to 2.9 times compared to 3.1 times last year.

Summary retail cash flow:

The following table reconciles Group operating profit before exceptional items and amortisation of acquired intangibles to retail free cash flow. Further details are included in Note 2, starting on page 45.

On a continuing operations basis	This year	Last year (52 weeks)	Last year (53 weeks)
Operating profit before exceptional items and amortisation of acquired intangibles	£1,815m	£2,525m	£2,571m
Less: Tesco Bank operating profit / (loss) before exceptional items	£175m	£(193)m	£(193)m
Retail operating profit from continuing operations before exceptional items and amortisation of acquired intangibles	£1,990m	£2,332m	£2,378m
Add back: Depreciation and amortisation	£1,614m	£1,560m	£1,589m
Other reconciling items	£(26)m	£63m	£51m
Pension deficit contribution	£(351)m	£(267)m	£(267)m
Underlying decrease in working capital	£450m	£264m	£24m
Retail cash generated from operations before exceptional items	£3,677m	£3,952m	£3,775m
Exceptional cash items:	£(41)m	£(195)m	£(195)m
Relating to prior years:
- Restructuring payments	£(36)m	£(124)m	£(124)m
Relating to current year:
- Litigation costs	£(93)m	-	-
- ATM income	£90m	-	-
- Other	£(2)m	£(71)m	£(71)m
Retail operating cash flow	£3,636m	£3,757m	£3,580m
Cash capex	£(902)m	£(842)m	£(846)m
Net interest	£(670)m	£(696)m	£(723)m
- Interest related to net debt (exc. lease liabilities)	£(226)m	£(213)m	£(240)m
- Interest related to lease liabilities	£(444)m	£(483)m	£(483)m
Tax paid	£(161)m	£(219)m	£(219)m
Property proceeds	£181m	£255m	£266m
Property purchases - store buybacks	£(291)m	£(172)m	£(172)m
Market purchases of shares (net of proceeds)	£(66)m	£(149)m	£(149)m
Acquisitions & disposals and dividends received	£21m	£321m	£321m
Repayments of obligations under leases	£(561)m	£(565)m	£(565)m
Retail free cash flow	£1,187m	£1,690m	£1,493m

Retail free cash flow decreased by £(503)m year-on-year to £1,187m, driven by lower cash profits due to the significant costs incurred in our response to the COVID-19 pandemic. In addition, last year's retail free cash flow included £277m of proceeds from the sale of our 20% stake in the Gain Land associate.

We benefited from a working capital inflow of £450m in the year, which was £186m higher than last year, primarily driven by the effect of higher food volumes. We saw a significant reduction in fuel volume in the year, leading to a c.£(180)m impact in working capital, however this was offset by a planned change to our fuel supplier payment terms.

Interest paid related to net debt (exc. lease liabilities) of £(226)m was up £(13)m year-on-year as the benefit of bond buybacks and refinancing at lower rates of interest was offset by the impact from borrowings acquired as part of The Tesco Property (No. 2) Limited Partnership.

Retail cash tax paid was £(161)m, £58m lower than last year, primarily as a result of lower retail operating profits.

Property proceeds of £181m includes £90m from properties in Poland which were sold separately to the sale of the business to Salling Group A/S, as well as other smaller disposals including the sale of the Booker Makro site in Croydon. We announced the completion of the sale of our business in Poland to Salling Group A/S in March 2021, following the end of the 2020/21 financial year.

We utilised £(291)m of cash to buy back stores in the UK, including £(238)m to buyback seven standalone stores which will result in an annual cash rental saving of £14m. We also acquired our partner's share in The Tesco Property (No. 2) Limited Partnership at a cost of £(54)m, bringing back into 100% ownership twelve stores and two distribution centres, which had been subject to fixed rental uplifts each year. This acquisition results in initial annual cash rental savings of £28m. We continue to evaluate store buyback opportunities on an individual lease basis and will use capital for this purpose where it is economically attractive.

We purchased £(66)m of shares in the market to offset dilution from the issuance of new shares to satisfy the requirements of share schemes. This was £83m lower than the prior year due to a reduced volume of share scheme maturities in the year.

Capital expenditure and space ¹ :

	UK & ROI		Central Europe		Tesco Bank		Group
	This year	Last year	This year	Last year	This year	Last year	This year	Last year
Capital expenditure	£875m	£774m	£85m	£101m	£55m	£52m	£1,015m	£927m
Openings (k sq ft)	135	270	30	-	-	-	165	270
Closures (k sq ft)	(113)	(400)	(22)	(70)	-	-	(135)	(470)
Repurposed (k sq ft)	1	-	(63)	(782)	-	-	(62)	(782)
Net space change (k sq ft)	23	(130)	(55)	(852)			(32)	(982)

1. 'Retail Selling Space' is defined as net space in store adjusted to exclude checkouts, space behind checkouts, customer service desks and customer toilets. Appendix 6 (p.67) provides a full breakdown of space by segment. Prior year capital expenditure is shown on a 53-week basis.

Capital expenditure shown in the table above reflects expenditure on ongoing business activities across the Group. Our capital expenditure for the year was £1,015m, £88m higher year-on-year, primarily due to higher maintenance spend in our UK stores and technology, including our investment in online capacity.

In the UK & ROI, we opened 28 convenience stores, one Superstore and one Urban Fulfilment Centre in West Bromwich.

We continue to expect annual Group capital expenditure of between £0.9bn - £1.2bn in future years.

Statutory capital expenditure of £1.8bn includes £0.5bn relating to the buyback of seven UK stores and The Tesco Property (No. 2) Limited Partnership (comprising twelve stores and two distribution centres) referred to above.

Further details of current and forecast space can be found in the supplementary information starting on page 122.

Property:

	This year			Last year
	UK & ROI	Central Europe	Group	UK & ROI	Central Europe	Group
Property¹ - fully owned
- Estimated market value	£15.9bn	£2.0bn	£17.9bn	£15.0bn	£2.0bn	£17.0bn
- NBV²	£14.8bn	£1.7bn	£16.5bn	£14.4bn	£1.6bn	£16.0bn
% net selling space owned	54%	77%	59%	53%	78%	58%
% property owned by value³	57%	73%	58%	55%	74%	57%

1. Stores, malls, investment property, offices, distribution centres, fixtures and fittings and work-in-progress. Excludes joint ventures.

2. Property, plant and equipment excluding vehicles, office equipment and construction in progress balances.

3. Excludes fixtures and fittings.

The estimated market value of our fully owned property as at the year-end increased by £0.9bn to £17.9bn. The market value of £17.9bn represents a surplus of £1.4bn over the net book value (NBV).

Our Group freehold property ownership percentage, by value, has increased by 1% year-on-year to 58%. In September we completed the purchase of our partner's 50% stake in The Tesco Property (No. 2) Limited Partnership, bringing back into full ownership twelve stores and two distribution centres. This acquisition contributed to a 2% increase in the percentage of fully owned properties in the UK & ROI and will deliver an annual cash rental saving of £28m. We also repurchased seven further stores in the UK, with an annual cash rental saving of £14m.

In Central Europe, we released £90m of value through the disposal of properties in Poland in the year.

Tesco Bank:

	This year	Last year	YoY
Revenue	£735m	£1,068m	(31.2)%
Operating profit/ (loss) before exceptional items	£(175)m	£193m	n/m
Statutory operating profit/ (loss)	£(470)m	£74m	(735.1)%
Lending to customers	£6,402m	£8,451m	(24.2)%
Customer deposits	£(5,738)m	£(7,707)m	(25.5)%
Net interest margin	5.2%	4.1%	1.1%pts
Total capital ratio	28.2%	23.1%	5.1%pts

The COVID-19 pandemic had a significant impact on performance across the Bank as a material decline in customer spending led to lower levels of new business activity in loans and credit cards, lower credit card balances, and a reduction in ATM and travel money transactions.

Higher levels of unemployment and lower GDP forecasts resulted in an increase in the provision for potential bad debts. This, in combination with the reduction in income, resulted in an operating loss of £(175)m for the full year, compared to a profit in the prior year of £193m. We also recognised an impairment charge of £(295)m in relation to goodwill due mainly to an increase in the discount rate as well as a reduction to anticipated future cash flows. The macroeconomic environment remains uncertain and will continue to impact banking activity levels.

Lending to customers declined by (24.2)% and customer deposit balances declined by (25.5)%, driven by lower levels of customer spending and a prudent approach to new credit risk. Lower levels of lending strengthened the Bank's capital position with the total capital ratio increasing to 28.2%, an improvement of 5.1 percentage points year-on-year. The balance sheet remains strong and the Bank continues to have sufficient capital and liquidity to absorb changes in both regulatory and funding requirements.

As previously announced, we expect to complete the acquisition of our partner's stake in the Tesco Underwriting joint venture in May. This will create an end-to-end insurance business that is uniquely positioned to help Tesco customers.

We supported our customers throughout the year by offering loan and credit card payment breaks to the end of March 2021, increasing contactless payment limits to allow more customers to shop safely, removing administration fees to allow insurance customers to change or cancel policies, reducing overdraft fees and fees related to early access to savings accounts. Our Pay+ app allows contactless payments of up to £250 and we now have over one million users.

An income statement for Tesco Bank can be found in the supplementary information on page 124 of this statement. Balance sheet and cash flow detail for Tesco Bank can be found within Note 2 starting on page 45 of this statement. Tesco Bank's full year results are also published today and are available at www.corporate.tescobank.com .

Contacts

Investor Relations: Chris Griffith 01707 940 900

Sarah Titterington 01707 940 693

Media: Christine Heffernan 0330 678 0639

Philip Gawith, Teneo 0207 420 3143

This document is available at www.tescoplc.com/prelims2021

A live webcast will be held today at 9.00am for investors and analysts and will be available on our website at www.tescoplc.com/prelims20 21 . This will include all Q&A and will also be available for playback after the event. All presentation materials, including a transcript, will be made available on our website.

Disclaimer

Certain statements made in this document are forward-looking statements. 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 are based on current expectations and assumptions and are subject to a number of known and unknown risks, uncertainties and other important factors that could cause actual results or events to differ materially from what is expressed or implied by those statements. Many factors may cause actual results, performance or achievements of Tesco to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements. Important factors that could cause actual results, performance or achievements of Tesco to differ materially from the expectations of Tesco include, among other things, general business and economic conditions globally, industry trends, competition, changes in government and other regulation and policy, including in relation to the environment, health and safety and taxation, labour relations and work stoppages, interest rates and currency fluctuations, changes in its business strategy, political and economic uncertainty, including as a result of global pandemics. As such, undue reliance should not be placed on forward-looking 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. Other than in accordance with legal and regulatory obligations, Tesco undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Independent auditor's report to the members of Tesco PLC

The independent auditor's report to the shareholders of Tesco Plc included within the preliminary announcement of Tesco is a direct extract from the independent auditor's report included within the annual report and financial statements. Therefore it references certain elements of the annual report which are not included within the preliminary announcement and the page numbers included in the opinion relate to the annual report and financial statements.

Report on the audit of the financial statements

Opinion

In our opinion:

- the financial statements of Tesco PLC (the 'Parent Company') and its subsidiaries (the 'Group') give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 27 February 2021 and of the Group's profit for the year then ended;

- the Group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) as adopted by the European Union and IFRSs as issued by the International Accounting Standards Board (IASB);

- the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 101 "Reduced Disclosure Framework"; and

- the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements which comprise:

- the Group income statement;

- the Group statement of comprehensive income;

- the Group and Parent Company balance sheets;

- the Group and Parent Company statements of changes in equity;

- the Group cash flow statement; and

- the related Notes 1 to 36 of the Group financial statements and Notes 1 to 15 of the Parent Company financial statements.

The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs as adopted by the European Union and IFRSs as issued by the International Accounting Standards Board (IASB). The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 "Reduced Disclosure Framework" (United Kingdom Generally Accepted Accounting Practice).

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the financial statements section of our report.

We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council's (the 'FRC's') Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit services provided to the Group and Parent Company for the year are disclosed in Note 3 (Income and expenses) to the financial statements. We confirm that the non-audit services prohibited by the FRC's Ethical Standard were not provided to the Group or the Parent Company.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Summary of our audit approach

Key audit matters

The key audit matters that we identified in the current year were:

Newly identified:

- Tesco Bank goodwill impairment;

Increased level of risk:

- pension valuation;

Similar level of risk:

- store impairment review;

- Tesco Bank loan impairment;

- recognition of commercial income;

- contingent liabilities;

- presentation of the Group's income statement; and

- retail technology environment, including IT security.

Materiality

We have determined materiality based on 0.13% of revenue. Our determined materiality is 8.3% of continuing profit before tax before exceptional items and amortisation of acquired intangibles and 0.6% of net assets.

In the prior year materiality was determined on the basis of 4.3% of continuing profit before tax before exceptional items and amortisation of acquired intangibles. Prior year materiality equated to 0.14% of prior year revenue. The change in the benchmark year on year is due to the impact of COVID-19 on the profitability of the group as a whole.

Independent auditor's report to the members of Tesco PLC continued

Scoping

Our audit scoping provides full scope audit coverage of 98% (2019/20: 96%) of revenue from continuing operations, 96% (2019/20: 92%) of continuing profit before tax before exceptional items and amortisation of acquired intangibles and 95% (2019/20: 92%) of net assets.

In addition, we performed full scope audit procedures covering 86% of revenue from discontinued operations and 84% of discontinued profit before tax before exceptional items.

Significant changes in our approach

Our 2020/21 report includes a new key audit matter relating to the assessment of impairment of goodwill relating to Tesco Personal Finance PLC ('Tesco Bank') due to the impact of the COVID-19 pandemic on the performance of, and outlook for, Tesco Bank. The pension valuation key audit matter reflects increased audit risk over the valuation of UK alternative investment assets in the current year due to market volatility.

We no longer report on the presentation of the operations of the Asia business as a key audit matter because, upon approval of the sale by the Board in 2020/21, these met the criteria of a discontinued operation in accordance with IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations.

There are no other significant changes in our approach in comparison to the prior period.

Conclusions relating to going concern

In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

Our evaluation of the directors' assessment of the Group's and Parent Company's ability to continue to adopt the going concern basis of accounting included the following audit procedures:

- obtained confirmation for the financing facilities including nature of facilities, repayment terms and covenants to ensure that these facilities remain available at year-end;

- assessed the reasonableness of the assumptions used in the Group's funding plan approved by the Board (which included the impact of macro-economic downturn, COVID-19 and Brexit);

- tested the clerical accuracy and assessed the sophistication of the model used to prepare the forecasts including obtaining an understanding of relevant controls over management's model;

- reviewed the liquidity forecast to assess whether there is sufficient headroom;

- challenged the assumptions used within the Group's going concern model;

- evaluated the historical accuracy of forecasts prepared by management;

- considered the mitigating factors identified by Group management in relation to their going concern analysis;

- assessed the sensitivity of the headroom in management's forecasts; and

- assessed the appropriateness of the Group's disclosure concerning the going concern basis.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group's and Parent Company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.

In relation to the reporting on how the Group has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors' statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Independent auditor's report to the members of Tesco PLC continued

Key auditmatterdescription

Howthescopeofourauditrespondedtothekeyauditmatter

Key observations

Tesco Bank goodwill impairment

As described in Note 1 (Accounting policies, judgements and estimates) and Note 10 (Goodwill and other intangible assets) of the financial statements, the Group held £4,271m (2019/20: £4,840m) of goodwill of which £480m relates to Tesco Bank (2019/20: £775m).

Under IAS 36: Impairment of assets, the Group is required to review goodwill for impairment at least annually by assessing the recoverable amount of each cash-generating unit, or group of cash-generating units, to which the goodwill relates.

Assessing the recoverable value of the Tesco Bank cash generating unit requires significant judgement in forecasting future cash flows, determining future growth rates and estimating the discount rate to be applied.

As detailed in Note 2 (Segmental reporting) Tesco Bank has made an operating (loss)/profit before exceptional items and amortisation of acquired intangibles of £(175)m (2019/20: £193m), reflecting an increase in the provision for potential bad debts and a reduction in income as a consequence of COVID-19.

The key audit matter specifically relates to the following:

- the post-tax discount rate that management has calculated which reflects an increase of 3.2% from the discount rate used as at 29 February 2020; and

- the quantum of the terminal value, specifically whether the forecast return to pre-COVID-19 levels of performance, including assumptions on revenue growth and cost reduction, and the timing thereof, is achievable.

An increase in the discount rate and a more pessimistic macro-economic outlook has led to a £295m (2019/20: £nil) impairment in the Tesco Bank goodwill, as noted in Note 15 (Impairment of non-current assets).

Tesco Bank goodwill is sensitive to changes in the key assumptions, with a 1% increase in the discount rate leading to a £203m increase in the impairment, as noted in Note 15.

The Audit Committee's discussion of this key audit matter is set out on page 69.

Our audit procedures included obtaining an understanding of relevant controls in relation to the review and approval of the discount rate and Tesco Bank's cash flow forecasts used in the model. We have also performed a series of specific audit procedures to address the key audit matter which included the following:

Management's discount rate

Use of experts: We engaged our valuation experts to assist in testing the discount rate used in calculating the recoverable value. We calculated an independent range and challenged management's inputs to their own calculation.

Sensitivity analysis: We performed a sensitivity analysis on the impairment of goodwill using our independently calculated rate.

Other recoverable value assumptions

Forecasting accuracy: We assessed management's forecasting accuracy based on the historical forecasts and actuals.

With support from our internal economic modelling experts, we challenged the achievability of the Bank's return to pre-COVID levels of performance with reference to the anticipated shape of the macro-economic recovery and relevant sectoral trends. We also challenged the achievability of the revenue growth and cost reduction assumptions in the later years of the cash flow forecasts with reference to management's specific initiatives for delivering growth and whether forecast margins are in line with historical margins and the wider market.

Use of independent market expectations: We challenged management's key assumptions within the cash flow forecasts based on historical and market trends.

Based on our audit procedures we concluded that the assumptions in the Tesco Bank goodwill impairment model were within an acceptable range and that the overall level of the impairment was appropriate. We have recommended to management that improvements be made to enhance the precision and granularity of the review controls over the impairment model.

We also consider the disclosures, including the sensitivity disclosure in Note 15, to be appropriate.

Independent auditor's report to the members of Tesco PLC continued

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Key observations

Pension valuation

As described in Note 1 (Accounting policies, judgements and estimates) and Note 29 (Post-employment benefits) of the financial statements, the Group has a defined benefit pension plan in the UK retail business. At 27 February 2021, the Group recorded a net retirement obligation before deferred tax of £1,222m (2019/20: £3,085m), comprising plan assets of £20,082m (2019/20: £17,425m) and plan liabilities of £21,304m (2019/20: £20,510m). The net retirement obligation in the UK represents 86% of the Group's total net retirement obligation.

The valuation of the Group's pension obligations is sensitive to changes in key assumptions and dependent on market conditions. In addition, pension plan assets include alternative investments (such as credit funds, hedge funds, infrastructure funds and private equity funds). As market conditions change, it is necessary to consider whether a stale price adjustment is required to reflect movements in the market value between the latest valuations and the position at year end.

The key audit matter specifically relates to the following:

- key assumptions linked to the valuation of the UK retail pension plan obligations: discount rate, inflation expectations and mortality assumptions; and

- the determination as to whether a stale price adjustment is required in relation to the year-end valuation of alternative investments in the UK retail pension plan given volatility in the market as a result of COVID-19.

The setting of these assumptions is complex and requires the exercise of significant management judgement with the support of management's actuaries and valuation experts.

The Audit Committee's discussion of this key audit matter is set out on page 69.

Our audit procedures included obtaining an understanding of relevant controls in relation to the pension obligation valuation process and the process to assess whether a stale price adjustment is required in relation to the alternative investment assets. In addition we performed the following:

Pension liability assumptions

We engaged our actuarial experts to review the key actuarial assumptions used, both financial and demographic, and considered the methodology utilised to derive these assumptions. In order to challenge management's discount rate, we independently calculated an appropriate rate and compared this to management's rate.

Working with our actuarial experts, we benchmarked and challenged other assumptions used by management in determining the value of pension liabilities particularly focusing on inflation and life expectancy. This included comparing the inputs and assumptions used in determining the valuation of the UK retail pension plan to those used in comparable pension plans and our internal benchmarks. Additionally, we have considered the independence, competence, capabilities and objectivity of the independent actuaries engaged by management to perform valuations of the relevant plans.

Alternative pension assets

We have worked with our pension asset specialists to assess and challenge whether a stale price adjustment is required in relation to the year-end valuation of alternative investments in the UK retail pension plan given volatility in the market as a result of COVID-19. We performed independent benchmarking and looked for contradictory evidence that the year-end valuation may not be appropriate, and therefore whether a stale price adjustment is required.

We are satisfied that the overall methodology is appropriate and the key assumptions applied in relation to determining the pension valuation are within our reasonable range.

We are satisfied that the valuation methodology of alternative asset investments at the year-end is appropriate and that no stale price adjustment was required.

Independent auditor's report to the members of Tesco PLC continued

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Key observations

Store impairment review

As described in Note 1 (Accounting policies, judgements and estimates), Note 11 (Property, plant and equipment) and Note 12 (Leases) of the financial statements, the Group held £17,211m (2019/20: £19,234m) of property, plant and equipment and £5,951m of right of use assets (2019/20: £6,874m) at 27 February 2021.

Under IAS 36: 'Impairment of assets', the Group is required to complete an impairment review of its store portfolio where there are indicators of impairment or impairment reversal. Judgement is required in identifying indicators of impairment charges or reversals and estimation is required in determining the recoverable amount of the Group's store portfolio.

Where a review for impairment, or reversal of impairment, is conducted, the recoverable amount is determined based on the higher of 'value-in-use' or 'fair value less costs of disposal'.

Value in use has been calculated using probability weighted cash flows reflecting management's best estimate of the impact of COVID-19, the consequences of Brexit, climate change and other economic factors including changes in customer behaviour on the future trading performance of the Group.

Management's impairment review is Sensitive to changes in the key assumptions as set out in Note 15.

The areas which are key to the store impairment review key audit matter are as follows:

- forecast cash flows for year 1 to year 3, from the Board-approved Long Term Plan ("LTP"), used to derive the value-in-use of store assets, specifically the ability of management to achieve their forecasts in light of changing consumer behaviour, the volatile retail environment brought about by COVID-19 and the Group's ability to realise forecast cost savings;

- the probability applied to each cash flow scenario in calculating the probability weighted cash flows;

- the discount rate used to determine value in use from the probability weighted cash flows; and

Our audit procedures included obtaining an understanding of relevant controls around the impairment review processes.

Our procedures in relation to the Group's value-in-use assessment included:

- challenging the key assumptions utilised in the cash flow forecasts with reference to historical trading performance, impacts of COVID-19 and Brexit on future cash flows, anticipated changes in consumer behaviour, competitor actions and our understanding of the Group's strategic initiatives;

- reviewing the accuracy of past forecasts of growth rates and future cash flows to assess the level of accuracy of the forecasting process;

- performing sensitivity analyses to assess the impact on impairment of a change in the probability percentages applied to the cash flow scenarios;

- with the support of our valuation specialists, calculating an independent range and challenging management's inputs to their discount rate, in particular their methodology to calculate an appropriate risk-free rate and equity risk premium;

- assessing and challenging the adequacy of management's sensitivity analysis in relation to key assumptions to consider the extent of change in those assumptions that either individually or collectively would be required to lead to a significant further impairment charge or reversal, in particular forecast cash flows and property fair values;

- using analytical techniques to identify unusual trends in data inputs and model outputs, to identify inaccurate data and any modelling errors or bias;

- assessing the methodology applied in determining the value in use compared with the requirements of IAS 36 'Impairment of Assets' and checking the integrity of the value-in-use model prepared by the Group;

- engaging our specialist modelling team to assist in auditing the integrity of the impairment model; and

Based on our audit procedures we concluded that the assumptions in the impairment models were within an acceptable range and that the overall level of net impairment reversal was reasonable. Through the completion of our work we are satisfied with the integrity of the model used for the current year impairment exercise. As discussed in the annual report in Note 15, we have recommended to management that improvements continue to be made to enhance the precision and granularity of the review controls over the impairment model.

We consider the disclosures, including the sensitivity disclosure in Note 15, to be appropriate.

Independent auditor's report to the members of Tesco PLC continued

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Key observations

Store impairment review continued

- the fair value of properties supporting the carrying value of store assets in each of the Group's territories particularly in response to the changing retail and broader property landscape as a result of COVID-19.

In addition, as the LTP is prepared on a top down basis and not at an individual store level, management perform an exercise to allocate the forecast performance across individual stores within the portfolio. This increases the complexity and level of judgement within the impairment model.

As a result of the Group's store impairment review completed during the year, a net impairment reversal of property, plant and equipment and right of use assets of £103m (2019/20: net impairment charge of £312m) was recognised.

The Audit Committee's discussion of this key audit matter is set out on page 69.

- with the involvement of our property valuation specialists challenging the assumptions used by the Group in determining the fair market value including those completed by external valuers and assessing whether appropriate valuation methodologies have been applied.

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Key observations

Tesco Bank loan impairment

As described in Note 19 (Loans and advances to customers and banks) the Group held an impairment provision in respect of loans and advances to customers of £625m at 27 February 2021 (2019/20: £488m). The expected credit loss ("ECL") on these loans and advances charged to the income statement was £360m in the year to 27 February 2021 (2019/20: £179m). The increase in provision compared to the prior year is primarily due to the deterioration in the macro-economic outlook, which management had previously concluded had a low probability of crystallising at 29 February 2020 based on reasonable and supportable information available at that time.

Loan impairment remains one of the most significant judgements made by management particularly in light of the uncertain economic outlook in the UK as a result of COVID-19 and the United Kingdom's withdrawal from the European Union.

We consider the most significant areas of judgement within the Group's collective provisioning methodologies, and therefore the key audit matters within loan impairment, to be:

Our audit procedures included obtaining an understanding of relevant controls which relate to the determination of loan impairments.

We have obtained an understanding of, and assessed, relevant controls over model governance forums, model monitoring and calibrations, including the determination of PMAs, the review and approval of macro-economic scenarios, the flow of data from Tesco Bank's information systems into the model and the flow of the output of the model to the general ledger.

Our audit work to address the key audit matter included the procedures noted below:

Macro-economic scenarios and related model refinements

With support from internal economic modelling experts, we challenged the macro-economic scenario forecasts that were incorporated into the ECL model, including management's selection of the relevant macro-economic variables.

The results of our testing are satisfactory. We concluded that management's provision is reasonably stated, and is supported by a methodology that is consistently applied and compliant with IFRS 9. We consider the sensitivity disclosures provided in Note 25 to the financial statements to be appropriate.

Independent auditor's report to the members of Tesco PLC continued

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Tesco Bank loan impairment continued

- Macro-economic scenarios - loan impairment provisions are required to be calculated on a forward-looking basis under IFRS 9 'Financial instruments'. Management apply significant judgement in determining the forecast macro-economic scenarios and the probability weighting of each scenario that are incorporated into the ECL model. Management also applied a number of methodology refinements in the current period to optimise model performance during this period of economic stress.

- Post-model adjustments ("PMAs") - management has included a number of PMAs to capture the potential downside risks and model limitations arising as a result of the continued macro-economic uncertainty. This includes PMAs to address the uncertainty associated with the future behaviour of customers who have been granted payment holidays and the impact of government support schemes on arrears and behavioural scores.

The sensitivities associated with management's judgements are presented within Note 25 to the financial statements.

The Audit Committee's discussion of this key audit matter is set out on page 69.

We assessed management's forecasts and their probability against external sources to assess their reasonableness, considering the forecasts in light of any contradictory information.

We assessed the competence, capabilities and objectivity of management's expert, who supplies the macro-economic forecasts, and considered whether the methodology adopted by the expert was reasonable.

With regards to the related model refinements, with support from internal credit risk modelling experts, we assessed the changes against the requirements of IFRS 9, tested the completeness and accuracy of the data which support management's conclusions regarding the appropriateness of the changes and tested that the methodology changes had been appropriately reflected in the models through review of the underlying computer code.

We also evaluated whether there was adequate disclosure regarding the macro-economic scenarios selected by management, their probability weighting, and the related sensitivities.

Post-model adjustments ("PMAs")

With support from internal credit risk experts, we challenged the appropriateness of each significant PMA recorded by management as well as the completeness of PMAs with reference to our observations in the broader market and understanding of the risk profile of the portfolio.

We evaluated the accuracy of the calculation of the PMAs, which included an assessment of the completeness and accuracy of the underlying data used by management in their calculation.

We also evaluated whether there was adequate disclosure regarding the significant PMAs including how they were determined and the range of possible outcomes.

Independent auditor's report to the members of Tesco PLC continued

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Key observations

Recognition of commercial income

As described in Note 1 (Accounting policies, judgements and estimates) and Note 22 (Commercial income) of the financial statements, the Group has agreements with suppliers whereby volume-related allowances, promotional and marketing allowances and various other fees and discounts are received in connection with the purchase of goods for resale from those suppliers. As such, the Group recognises a reduction in cost of sales as a result of amounts receivable from those suppliers.

Commercial income should only be recognised as income within the income statement when the performance conditions associated with it have been met, for example where the marketing campaign has been held.

The variety and number of the buying arrangements with suppliers can make it complex to determine the performance conditions associated with the income, giving rise to a requirement for management judgement. As such we have identified this as a key audit matter and considered that there was a potential for fraud through possible manipulation of this income.

The Audit Committee's discussion of this key audit matter is set out on page 69.

Our audit procedures included obtaining an understanding of relevant controls the Group has established in relation to commercial income recognition.

In addition, we performed the following:

- testing whether amounts recognised were accurate and recorded in the correct period, by agreeing to the contractual performance obligations in a sample of individual supplier agreements;

- testing commercial income balances included within inventories and trade and other receivables, or netted against trade and other payables (as set out in Note 22) via balance sheet reconciliation procedures;

- circularising a sample of suppliers to test whether the arrangements recorded were complete; where responses from suppliers were not received, we completed alternative procedures such as agreement to underlying contractual arrangements;

- holding discussions with a sample of the Group's buying personnel to further understand the buying processes;

- reviewing the impact of COVID-19 on arrangements with suppliers across the Group;

- using data analytics to identify commercial income deals which exhibited characteristics of audit interest upon which we completed detailed audit testing;

- reviewing the Group's ongoing compliance with the Groceries Supplier Code of Practice (GSCOP) and additionally, reviewing the reporting and correspondence to the Group's supplier hotline in order to identify any areas where further investigation was required; and

- assessing the adequacy of the disclosures made in relation to commercial income in the Group's financial statements.

The results of our testing are satisfactory. We consider the disclosure given around supplier rebates provide an appropriate understanding of the types of rebate income received and the impact on the Group's balance sheet.

Independent auditor's report to the members of Tesco PLC continued

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Key observations

Contingent liabilities

As described in Note 1 (Accounting policies, judgements and estimates), Note 27 (Provisions) and Note 34 (Commitments and contingencies) of the financial statements, the Group has a number of contingent liabilities and provisions regarding significant legal matters. Judgement is required in assessing the likelihood of outflow, the potential quantum of any outflow and the associated disclosure requirements.

This key audit matter specifically relates to the following exposures:

- Homeplus claim: following the sale of Homeplus in 2015 the Group has received claims from the purchaser relating to the sale of the business. In July 2020, the arbitration tribunal dismissed the majority of the claims but made findings of liability in relation to the remaining claims, reserving its position in relation to quantum. Given the decision is binding, the likelihood of a material outflow is now considered to be probable and therefore a provision of £88m was recorded during the year.

- UK shareholder litigation: in July 2020, the Group settled claims brought by two claimant groups at a cost to the Group of £93m linked to the overstatement of expected profits in 2014. In September 2020 two further claimant groups issued proceedings against the Group in respect of the same matter and which may therefore result in legal exposures.

- Equal pay claim: Tesco Stores Limited has received claims from current and former store colleagues alleging that their work is of equal value to that of colleagues working in the Group's distribution centres and that differences in terms and conditions relating to pay are not objectively justifiable.

The Audit Committee's discussion of this key audit matter is set out on page 69.

Our audit procedures included obtaining an understanding of relevant controls in relation to the contingent liabilities and provisions and management's disclosures. In assessing the potential exposures to the Group, we have completed a range of procedures including:

- working with our forensic accounting experts to understand and challenge the interpretation of any legal and tribunal findings and conclusions;

- assessing the reasonableness of management's likelihood and quantification of outflow assessment;

- challenging the appropriateness of amounts provided for the Homeplus claim;

- reading Board and other meeting minutes to identify other matters relevant to the Group's accounting and disclosure considerations;

- meeting with the Group's internal legal advisors to understand ongoing and potential legal matters and reviewing third party correspondence and reports;

- meeting with the Group's external legal advisors to challenge the status of the cases and their expectations as to expected outcome and the size of any liability; and

- reviewing the proposed accounting and disclosure of potential legal liabilities, considering the third party assessment of open matters.

Based on our audit procedures we are satisfied that the provision recognised in relation to the Homeplus arbitration claim is reasonable. We also conclude that the Group's contingent liabilities disclosure is complete and, specifically, the accounting and disclosures in relation to the ongoing UK shareholder actions and the Group's equal pay matter are appropriate.

Independent auditor's report to the members of Tesco PLC continued

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Key observations

Presentation of Group's income statement

One of the Group's key performance indicators is 'Group operating profit before exceptional items and amortisation of acquired intangibles' (2020/21: £1,815m, 2019/20: £2,571m).

Management's reconciliation of this key performance indicator to the Group's statutory profit measure is set out in Note 2 (Segmental reporting) of the financial statements.

Management judgement is required when applying this policy and when determining the classification of items as exceptional within the Group's income statement.

We have determined that there is a potential for fraud through possible manipulation of the Group's income statement presentation. This is due to the level of judgement involved and remuneration targets being linked to key performance indicators, particularly in light of COVID-19 and the potential for management to attribute exceptional items to the pandemic that are difficult to quantify and could be misleading.

The Audit Committee's discussion of this key audit matter is set out on page 69.

Our audit procedures included obtaining an understanding of relevant controls which address the risk of inappropriate presentation of the Group's income statement.

In order to address this key audit matter we have completed audit procedures including:

- challenging the accuracy of exceptional items disclosed by the Group by agreeing to underlying supporting documentation;

- assessing the appropriateness of exceptional items disclosed by the Group both individually and in aggregate, considering consistency with the Group's definition of exceptional items, IAS 1 and recent guidance from the FRC, specifically considering their recent guidance in light of the COVID-19 pandemic;

- assessing the appropriateness of excluding the amortisation of intangible assets acquired in business combinations from the Group's operating profit alternative performance measure;

- evaluating the presentation of COVID-19 costs within the Group's underlying results;

- assessing transactions completed outside of the normal course of business;

- assessing consistency of application of the policy across multiple financial years; and

- assessing whether any bias exists in management's presentation of results to achieve key targets which drive elements of variable executive remuneration, including the annual bonus and Performance Share Plan award.

Based on our testing we have concluded that the accuracy, classification and disclosure of the exceptional and other items is appropriate.

We concur with management's treatment of COVID-19 costs and the business rates relief repayment as underlying, rather than exceptional, expenses for 2020/21.

Independent auditor's report to the members of Tesco PLC continued

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Key observations

Retail technology environment, including IT security

The Group's retail operations utilise a range of information systems. From 2015/16 to 2019/20 we reported deficiencies in certain IT controls. These deficiencies could have an adverse impact on the Group's controls and financial reporting systems.

IT remediation is a complex, multi-year project involving management judgement and processes which are at risk of being inappropriately designed or executed. Areas of management's remediation programme to which the risk has been pinpointed include:

- appropriateness of remediated access controls across in-scope applications and their supporting infrastructure; and

- whether the remediated controls address previously identified deficiencies.

We have continued to challenge and assess changes to the IT environment through the testing of remediated controls and concluding on the sufficiency and appropriateness of management's changes.

During the year we have obtained an understanding of relevant controls over the information systems that are important to financial reporting, including the changes made as part of the Group's IT remediation programme.

Consistent with 2019/20, in 2020/21 we did not plan to take a control reliant audit approach in the retail business due to the ongoing weaknesses in the IT environment.

We have obtained an understanding of relevant manual controls which relate to identified deficiencies and consistent with the prior year we extended the scope of our substantive audit procedures in response to the deficiencies which affected the applications and databases within the scope of our audit.

Although management's remediation plan is designed to address our concerns, given the complexity of the underlying systems the plan is a multi-year programme and not yet complete, and therefore weaknesses remain in the control environment. Progress continues to be made and further remediation work is ongoing.

Independent auditor's report to the members of Tesco PLC continued

Our application of materiality

Materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

	Groupfinancialstatements	Parent Company financialstatements
Materiality	£75m (2019/20: £85m)	£56m (2019/20: £55m)
Basis for determining materiality	0.13% (2019/20: 0.13%) of revenue from continuing operations of £57,887m (2019/20: £58,091m).	Materiality represents less than 1% (2019/20: less than 1%) of net assets.
Rationale for the benchmark applied	We have determined materiality based on 0.13% of revenue. Our determined materiality is 8.3% of continuing profit before tax before exceptional items and amortisation of acquired intangibles and 0.6% of net assets. In the prior year materiality was determined on the basis of 4.3% of contingent profit before tax before exceptional items and amortisation of acquired intangibles. Prior year materiality equated to 0.14% of prior year revenue. The change in the benchmark year on year is due to the impact of COVID-19 on the profitability of the group as a whole. Refer to Note 4 for further details of exceptional items, amortisation of acquired intangibles and management's reconciliation of this alternative performance measure to the Group's statutory measure.	As this is the Parent Company of the Group, it does not generate significant revenues other than investment returns but incurs costs. Net assets are of most relevance to users of the financial statements.
Component materiality	The work performed on components identified in our Group audit scope (excluding the Parent Company) was completed to a component materiality level between £8m and £37m (2019/20: £26m and £39m).

Performance materiality

We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole.

	Groupfinancialstatements	Parent Company financialstatements
Performance materiality	65% (2019/20: 66%) of Group materiality	65% (2019/20: 70%) of Parent Company materiality
Basis and rationale for determining performance materiality	As we continue to be unable to rely on internal controls in the retail business we have used a lower percentage of materiality to determine our performance materiality for 2020/21. In determining performance materiality, we have also considered the nature, quantum and volume of corrected and uncorrected misstatements in prior periods, including prior period errors, and our expectation that misstatements from prior periods would not likely recur in the current period.

Error reporting threshold

We agreed with the Audit Committee that we would report to the Committee all uncorrected audit differences in excess of £3.75m (2019/20: £4.25m), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

Independent auditor's report to the members of Tesco PLC continued

An overview of the scope of our audit

Identification and scoping of components

Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. The Group has subsidiary grocery retail operations in five countries presented within continuing operations and three countries presented within discontinued operations, together with interests in a number of other businesses both in the UK and internationally.

The Group's accounting process is structured around local finance functions and is further supported by shared service centres in Bengaluru, India and Budapest, Hungary which provide accounting and administrative support for the Group's core retail operations. Each local finance function reports into the central Group finance function based at the Group's head office. Based on our assessment of the Group, we focused our Group audit scope primarily on the audit work on six significant retail locations within continuing operations (UK, Booker, Republic of Ireland, Czech Republic, Hungary and Slovakia), two significant retail locations within discontinued operations (Poland and Thailand) and Tesco Bank. The operations in Czech Republic, Hungary and Slovakia are managed as one combined business. All of these were subject to a full audit and represent 98% (2019/20: 96%) of revenue from continuing operations, 96% (2019/20: 92%) of continuing profit before tax before exceptional items and amortisation of acquired intangibles, and 95% (2019/20: 92%) of net assets. In respect of discontinued operations our full scope audit procedures covered 86% of revenue and 84% of profit before tax before exceptional items.

In addition, we instructed the Malaysia component to perform review procedures and have performed analytical review procedures at a Group level for three other businesses (dunnhumby, Tesco Mobile and OneStop), where the extent of our testing was based on our assessment of the risks of material misstatement and of the size of the Group's operations at these locations.

At the Group level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or analytical review procedures. The most significant component of the Group is its retail business in the UK. As such, there is extensive interaction between the Group and the UK audit team to allow appropriate level of direction and supervision in this audit work. During the course of our audit, the UK audit team visited 52 (2019/20: 52) retail stores in the UK to attend either inventory counts or in order to complete store control visits, and 5 (2019/20: 5) distribution centre inventory counts.

Our consideration of the control environment

The Group's retail operations utilise a range of information systems. In previous years we reported deficiencies in certain IT controls. As described in the Audit Committee Report on page 69, management has implemented a remediation plan, progress against which is monitored. Accordingly, consistent with the prior year, we extended the scope of our substantive audit procedures in response to the identified deficiencies. Further details are set out in the 'Retail technology environment, including IT security deficiencies' key audit matter in section 5.8 above.

Working with other auditors

With the restrictions in place as a result of COVID-19, the Group audit team was not physically able to visit the significant locations set out above. However, the Group audit team held communications through virtual meetings with all in scope components for 2020/21. These were timed to allow the Group audit team to be involved in the planning process, to attend audit close meetings or other key meetings with management during the early warning and year-end audit work and perform virtual reviews of the audit files for compliance with auditing standards. We also had a dedicated audit partner focused on overseeing the role of the component audit teams, ensuring that we applied a consistent audit approach to the operations in the Group's international businesses.

The UK, Republic of Ireland, Central Europe and Booker key component audit teams attended a virtual two-day planning meeting led by the Group audit team and held prior to the commencement of our detailed audit work. The purpose of this planning meeting was to provide a common level of understanding of the Group's businesses, its core strategy and a discussion of the significant risks and workshops on our planned audit approach. Group management, component management and the Audit Committee Chair also attended part of the meeting to support these planning activities.

In addition, the Group team led a virtual planning briefing with the Thailand and Malaysia component audit teams prior to the commencement of their detailed audit and review work. The purpose of this meeting was to provide the component teams with information on the Group's business and discuss the planned testing approach to significant risks and other areas. Particular focus was given to the impact on the audit approach as a result of the disposal of the Group's businesses in Asia.

Independent auditor's report to the members of Tesco PLC continued

Other information

The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. The directors are responsible for the other information contained within the annual report.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

Responsibilities of directors

As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Group's and the Parent Company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

Extent to which the audit was considered capable of detecting irregularities, including fraud

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.

Identifying and assessing potential risks related to irregularities

In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following:

- the nature of the industry and sector, control environment and business performance including the design of the Group's remuneration policies, key drivers for directors' remuneration, bonus levels and performance targets;

- results of our enquiries of management, the Group's Internal Audit function, the Group's Security function, the Group's Compliance Officer, the Group's General Counsel and the Audit Committee, about their own identification and assessment of the risks of irregularities;

- any matters we identified having obtained and reviewed the Group's documentation of their policies and procedures relating to:

o identifying, evaluating and complying with laws and regulations and whether management were aware of any instances of non-compliance;

o detecting and responding to the risks of fraud and whether management have knowledge of any actual, suspected or alleged fraud;

o the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations including the Group's controls relating to Group's ongoing compliance with the Groceries Supplier Code of Practice (GSCOP) requirements and the requirements of the United Kingdom's Prudential Regulation Authority ("PRA") and Financial Conduct Authority ("FCA") in relation to Tesco Bank; and

- the matters discussed among the audit engagement team including significant component audit teams and relevant internal specialists, including IT, tax, valuations and pensions actuarial specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud.

Independent auditor's report to the members of Tesco PLC continued

As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the following areas: timing of recognition of commercial income, Tesco Bank's loan impairment provisioning, posting of unusual journals and complex transactions and manipulating the Group's alternative performance profit measures and other key performance indicators to meet remuneration targets and externally communicated targets. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.

We also obtained an understanding of the legal and regulatory frameworks that the Group operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the Group's ongoing compliance with the GSCOP, UK Companies Act, Listing Rules, employment law, health and safety, pensions legislation and tax legislation.

In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be fundamental to the Group's ability to operate or to avoid a material penalty. These included the requirements of the United Kingdom's PRA and FCA in relation to Tesco Bank.

Audit response to risks identified

As a result of performing the above, we identified presentation of the Group's income statement, recognition of commercial income and Tesco Bank's loan impairment provisioning as key audit matters related to the potential risk of fraud. The key audit matters section of our report explains the matters in more detail and also describes the specific procedures we performed in response to those key audit matters.

In addition to the above, our procedures to respond to risks identified included the following:

- reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements;

- enquiring of management, the Audit Committee and in-house legal counsel concerning actual and potential litigation and claims;

- performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud;

- reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC ;

- in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business; and

- As part of assessing relevant controls, we sought to gain an understanding of the impact that COVID-19 and remote working had on the nature and operation of those controls, to inform our risk assessment and conclusions on their effectiveness.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and significant component audit teams, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.

Report on other legal and regulatory requirements

Opinions on other matters prescribed by the Companies Act 2006

In our opinion the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

- the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

- the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors' report.

Independent auditor's report to the members of Tesco PLC continued

Corporate Governance Statement

The Listing Rules require us to review the directors' statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the Group's compliance with the provisions of the UK Corporate Governance Code specified for our review.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit:

- the directors' statement with regards the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on page 99;

- the directors' explanation as to its assessment of the Group's prospects, the period this assessment covers and why the period is appropriate set out on page 38;

- the directors' statement on fair, balanced and understandable set out on page 101;

- the board's confirmation that it has carried out a robust assessment of the emerging and principal risks set out on pages 31 to 32;

- the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on pages 33 to 37; and

- the section describing the work of the Audit Committee set out on pages 67 to 71.

Matters on which we are required to report by exception

Adequacy of explanations received and accounting records

Under the Companies Act 2006 we are required to report to you if, in our opinion:

- we have not received all the information and explanations we require for our audit; or

- adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

- the Parent Company financial statements are not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

Directors' remuneration

Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors' remuneration have not been made or the part of the directors' remuneration report to be audited is not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

Other matters which we are required to address

Auditor tenure

Following the recommendation of the Audit Committee, we were appointed by the Group's shareholders on 26 June 2015 to audit the financial statements for the year ended 27 February 2016 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is six years, covering the years ended 27 February 2016 to 27 February 2021.

Consistency of the audit report with the additional report to the Audit Committee

Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK).

Use of our report

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Signature

John Adam (Senior statutory auditor)

For and on behalf of Deloitte LLP

Statutory Auditor

London, United Kingdom

13 April 2021

Group income statement

			52 weeks ended 27February2021			53 weeks ended 29 February 2020(a)
	Notes		Before exceptional items and amortisation of acquired intangibles £m	Exceptional items and amortisation of acquired intangibles (Note 4) £m	Total £m	Before exceptional items and amortisation of acquired intangibles £m	Exceptional items and amortisation of acquired intangibles (Note 4) £m		Total £m
Continuing operations
Revenue	2		57,887	-	57,887	58,091		-	58,091
Cost of sales^(b)			(53,921)	383	(53,538)	(53,601)		(209)	(53,810)
Impairment loss on financial assets^(b)	2		(384)	-	(384)	(183)		-	(183)
Gross profit/(loss)			3,582	383	3,965	4,307		(209)	4,098
Administrative expenses			(1,767)	(462)	(2,229)	(1,736)		(156)	(1,892)
Operating profit/(loss)			1,815	(79)	1,736	2,571		(365)	2,206
Share of post-tax profits/(losses) of joint ventures	14		26	-	26	-		(8)	(8)
and associates
Finance income	5		15	-	15	20		-	20
Finance costs	5		(952)	-	(952)	(1,039)		(151)	(1,190)
Profit/(loss) before tax			904	(79)	825	1,552		(524)	1,028
Taxation	6		(200)	96	(104)	(342)		52	(290)
Profit/(loss) for the year from continuing operations			704	17	721	1,210		(472)	738
Discontinued operations
Profit/(loss) for the year from discontinued operations	7		309	5,117	5,426	318		(83)	235
Profit/(loss) for the year			1,013	5,134	6,147	1,528		(555)	973
Attributable to:
Owners of the parent			1,009	5,134	6,143	1,526		(555)	971
Non-controlling interests			4	-	4	2		-	2
			1,013	5,134	6,147	1,528		(555)	973
Earnings/(losses) per share from continuing and discontinued operations
Basic	9		63.80p			9.99p
Diluted	9		63.62p			9.93p
Earnings/(losses) per share from continuing operations
Basic		9	7.56p			7.60p
Diluted		9	7.54p			7.54p

The notes on pages 35 to 108 form part of these financial statements.

(a) Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

(b) Impairment loss on financial assets' comparatives have been presented separately from Cost of sales. Refer to Note 1 for further details.

Group statement of comprehensive income/(loss)

	Notes	52 weeks 2021 £m	53 weeks 2020* £m
Items that will not be reclassified to the Group income statement
Remeasurements of defined benefit pension schemes	29	(963)	(466)
Net fair value gains/(losses) on inventory cash flow hedges		(3)	49
Tax on items that will not be reclassified	6	248	71
		(718)	(346)
Items that may subsequently be reclassified to the Group income statement
Change in fair value of financial assets at fair value through other comprehensive income		(1)	9
Currency translation differences:
Retranslation of net assets of overseas subsidiaries, joint ventures and associates		(68)	(68)
Movements in foreign exchange reserve and net investment hedging on subsidiary disposed,		(413)	-
reclassified and reported in the Group Income Statement
Gains/(losses) on cash flow hedges:
Net fair value gains/(losses)		59	57
Reclassified and reported in the Group income statement		(86)	(7)
Tax on items that may be reclassified	6	(3)	(9)
		(512)	(18)
Total other comprehensive income/(loss) for the year		(1,230)	(364)
Profit/(loss) for the year		6,147	973
Total comprehensive income/(loss) for the year		4,917	609

Attributable to:
Owners of the parent		4,913	607
Non-controlling interests		4	2
Total comprehensive income/(loss) for the year		4,917	609

Total comprehensive income/(loss) attributable to owners of the parent arising from:
Continuing operations		(65)	352
Discontinued operations		4,978	255
		4,913	607

The notes on pages 35 to 108 form part of these financial statements.

* Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

Group balance sheet

	Notes	27 February 2021 £m	29 February 2020* £m	23 February 2019* £m
Non-current assets
Goodwill and other intangible assets	10	5,393	6,078	6,223
Property, plant and equipment	11	17,211	19,234	19,186
Right of use assets	12	5,951	6,874	7,713
Investment property	13	19	26	36
Investments in joint ventures and associates	14	178	307	602
Financial assets at fair value through other comprehensive income	16	11	866	979
Investment securities at amortised cost	16	752	-	-
Trade and other receivables	18	170	166	243
Loans and advances to customers and banks	19	3,309	4,171	7,868
Derivative financial instruments	24	1,425	1,083	1,178
Deferred tax assets	6	552	449	408
		34,971	39,254	44,436
Currentassets
Financial assets at fair value through othercomprehensiveincome	16	3	202	67
Investment securities at amortised cost	16	175	-	-
Inventories	17	2,069	2,433	2,617
Trade andotherreceivables	18	1,263	1,396	1,550
Loans and advances to customersandbanks	19	3,093	4,280	4,882
Derivativefinancialinstruments	24	37	63	52
Currenttaxassets		41	21	6
Short-terminvestments	20	1,011	1,076	390
Cash andcashequivalents	20	2,510	4,137	4,227
		10,202	13,608	13,791
Assets of the disposal groups and non-current assets classified as heldforsale	7	605	285	98
		10,807	13,893	13,889
Current liabilities
Trade and other payables	21	(8,399)	(8,922)	(9,131)
Borrowings	23	(1,080)	(2,219)	(2,874)
Lease liabilities	12	(575)	(598)	(646)
Derivative financial instruments	24	(81)	(61)	(250)
Customer deposits and deposits from banks	26	(5,321)	(6,377)	(8,832)
Current tax liabilities		(79)	(324)	(325)
Provisions	27	(186)	(155)	(226)
		(15,721)	(18,656)	(22,284)
Liabilities of the disposal groups classified as held for sale	7	(276)	-	-
Net current liabilities		(5,190)	(4,763)	(8,395)
Non-current liabilities
Trade and other payables	21	(109)	(170)	(365)
Borrowings	23	(6,188)	(6,005)	(5,580)
Lease liabilities	12	(7,827)	(8,968)	(9,859)
Derivative financial instruments	24	(926)	(887)	(389)
Customer deposits and deposits from banks	26	(1,017)	(1,830)	(3,296)
Post-employment benefit obligations	29	(1,222)	(3,085)	(2,808)
Deferred tax liabilities	6	(48)	(40)	(49)
Provisions	27	(119)	(137)	(147)
		(17,456)	(21,122)	(22,493)
Netassets		12,325	13,369	13,548
Equity
Share capital	30	490	490	490
Share premium		5,165	5,165	5,165
All other reserves		3,183	3,658	3,770
Retained earnings		3,505	4,078	4,147
Equity attributable to owners of the parent		12,343	13,391	13,572
Non-controlling interests		(18)	(22)	(24)
Totalequity		12,325	13,369	13,548

The notes on pages 35 to 108 form part of these financial statements.

* Refer to Note 1 for further details regarding the prior year restatement.

Ken Murphy

Alan Stewart

Directors

The financial statements on pages 29 to 108 were approved and authorised for issue by the Directors on 13 April 2021.

Group statement of changes in equity

			All other reserves
	Share capital £m	Share premium £m	Capital redemption reserve £m	Cost of hedging reserve £m	Hedging reserve £m	Translation reserve £m	Own shares held £m	Merger reserve £m	Retained earnings £m	Total £m	Non-controlling interests £m	Total equity £m
At 29 February 2020 (restated*)	490	5,165	16	(15)	154	663	(250)	3,090	4,078	13,391	(22)	13,369
Profit/(loss) for the year	-	-	-	-	-	-	-	-	6,143	6,143	4	6,147
Other comprehensive income/(loss)
Retranslation of net assets of overseas subsidiaries, joint ventures and associates	-	-	-	-	-	(68)	-	-	-	(68)	-	(68)
Movements in foreign exchange reserve and net investment hedging on subsidiary disposed, reclassified and reported in the Group income statement (Note 7)	-	-	-	-	-	(413)	-	-	-	(413)	-	(413)
Change in fair value of financial instruments at fair value through other comprehensive income	-	-	-	-	-	-	-	-	(1)	(1)	-	(1)
Remeasurements of defined benefit pension schemes	-	-	-	-	-	-	-	-	(963)	(963)	-	(963)
Gains/(losses) on cash flow hedges	-	-	-	17	39	-	-	-	-	56	-	56
Cash flow hedges reclassified and reported in the Group income statement	-	-	-	-	(86)	-	-	-	-	(86)	-	(86)
Tax relating to components of other comprehensive income	-	-	-	(2)	11	(7)	-	-	243	245	-	245
Total other comprehensive income/(loss)	-	-	-	15	(36)	(488)	-	-	(721)	(1,230)	-	(1,230)
Total comprehensive income/(loss)	-	-	-	15	(36)	(488)	-	-	5,422	4,913	4	4,917
Inventory cash flow hedge movements
Gains/(losses) transferred to the cost of inventory	-	-	-	-	(28)	-	-	-	-	(28)	-	(28)
Total inventory cash flow hedge movements	-	-	-	-	(28)	-	-	-	-	(28)	-	(28)
Transactions with owners
Purchase of own shares	-	-	-	-	-	-	(246)	-	-	(246)	-	(246)
Share-based payments	-	-	-	-	-	-	308	-	(97)	211	-	211
Dividends (Note 8)	-	-	-	-	-	-	-	-	(5,892)	(5,892)	-	(5,892)
Tax on items charged to equity	-	-	-	-	-	-	-	-	(6)	(6)	-	(6)
Total transactions with owners	-	-	-	-	-	-	62	-	(5,995)	(5,933)	-	(5,933)
At 27 February 2021	490	5,165	16	-	90	175	(188)	3,090	3,505	12,343	(18)	12,325

The notes on pages 35 to 108 form part of these financial statements.

* Refer to Note 1 for further details regarding the prior year restatement.

Group statement of changes in equity continued

			All other reserves
	Share capital £m	Share premium £m	Capital redemption reserve £m	Cost of hedging reserve £m	Hedging reserve £m	Translation reserve £m	Own shares held £m	Merger reserve £m	Retained earnings £m	Total £m	Non-controlling interests £m	Total equity £m
At 23 February 2019 (as previously reported)	490	5,165	16	(5)	118	730	(179)	3,090	4,031	13,456	(24)	13,432
Cumulative adjustment to opening balances	-	-	-	-	-	-	-	-	116	116	-	116
At 23 February 2019 (restated*)	490	5,165	16	(5)	118	730	(179)	3,090	4,147	13,572	(24)	13,548
Profit/(loss) for the year	-	-	-	-	-	-	-	-	971	971	2	973
Other comprehensive income/(loss)
Retranslation of net assets of overseas subsidiaries, joint ventures and associates	-	-	-	-	-	(68)	-	-	-	(68)	-	(68)
Change in fair value of financial assets at fair value through other comprehensive income	-	-	-	-	-	-	-	-	9	9	-	9
Remeasurements of defined benefit pension schemes	-	-	-	-	-	-	-	-	(466)	(466)	-	(466)
Gains/(losses) on cash flow hedges	-	-	-	(12)	118	-	-	-	-	106	-	106
Cash flow hedges reclassified and reported in the Group income statement	-	-	-	-	(7)	-	-	-	-	(7)	-	(7)
Tax relating to components of other comprehensive income	-	-	-	2	(11)	1	-	-	70	62	-	62
Total other comprehensive income/(loss)	-	-	-	(10)	100	(67)	-	-	(387)	(364)	-	(364)
Total comprehensive income/(loss)	-	-	-	(10)	100	(67)	-	-	584	607	2	609
Inventory cash flow hedge movements
Gains/(losses) transferred to the cost of inventory	-	-	-	-	(64)	-	-	-	-	(64)	-	(64)
Total inventory cash flow hedge movements	-	-	-	-	(64)	-	-	-	-	(64)	-	(64)
Transactions with owners
Purchase of own shares	-	-	-	-	-	-	(221)	-	-	(221)	-	(221)
Share-based payments	-	-	-	-	-	-	150	-	5	155	-	155
Dividends (Note 8)	-	-	-	-	-	-	-	-	(656)	(656)	-	(656)
Tax on items charged to equity	-	-	-	-	-	-	-	-	(2)	(2)	-	(2)
Total transactions with owners	-	-	-	-	-	-	(71)	-	(653)	(724)	-	(724)
At 29 February 2020	490	5,165	16	(15)	154	663	(250)	3,090	4,078	13,391	(22)	13,369

The notes on pages 35 to 108 form part of these financial statements.

* Refer to Note 1 for further details regarding the prior year restatement.

Group cash flow statement

	Notes	52 weeks 2021 £m	53 weeks 2020 (restated(a)(b)) m
Cash flows generated from/(used in) operating activities
Operating profit/(loss) of continuing operations		1,736	2,206
Operating profit/(loss) of discontinued operations		5,482	312
Depreciation and amortisation		1,767	2,157
(Profit)/loss arising on sale of property, plant and equipment, investment property, intangible assets, assets classified as held for sale and early termination of leases		(190)	(170)
(Profit)/loss arising on sale of financial assets		-	(3)
(Profit)/loss arising on sale of joint ventures and associates		(29)	(68)
(Profit)/loss arising on sale of subsidiaries	7	(5,197)	-
Transaction costs associated with sale of subsidiaries		6	22
Net impairment loss/(reversal) on property, plant and equipment, right of use assets, intangible assets and investment property		(85)	302
Impairment of goodwill	15	295	-
Net remeasurement (gain)/loss of non-current assets held for sale		(5)	-
Impairment of joint ventures		-	47
Adjustment for non-cash element of pensions charge		14	9
Other defined benefit pension scheme payments	29	(2,851)	(267)
Share-based payments		30	87
Tesco Bank fair value movements included in operating profit/(loss)		367	100
Retail (increase)/decrease in inventories		(52)	178
Retail (increase)/decrease in development stock		2	1
Retail (increase)/decrease in trade and other receivables		63	175
Retail increase/(decrease) in trade and other payables		329	(403)
Retail increase/(decrease) in provisions		56	(87)
Retail (increase)/decrease in working capital		398	(136)
Tesco Bank (increase)/decrease in loans and advances to customers and banks		1,686	127
Tesco Bank (increase)/decrease in trade and other receivables		62	310
Tesco Bank increase/(decrease) in customer and bank deposits, trade and other payables		(1,902)	(3,849)
Tesco Bank increase/(decrease) in provisions		2	5
Tesco Bank (increase)/decrease in working capital		(152)	(3,407)
Cash generated from/(used in) operations		1,586	1,191
Interest paid		(729)	(803)
Corporation tax paid		(255)	(340)
Net cash generated from/(used in) operating activities		602	48
Cash flows generated from/(used in) investing activities
Proceeds from sale of property, plant and equipment, investment property, intangible assets and assets classified as held for sale		237	3,965
Purchase of property, plant and equipment and investment property		(1,171)	(1,003)
Purchase of intangible assets		(206)	(201)
Disposal of subsidiaries, net of cash disposed	7	7,093	(6)
Acquisition of subsidiaries, net of cash acquired		15	-
Disposal of associate		-	277
Net (increase)/decrease in loans to joint ventures and associates		(2)	8
Investments in joint ventures and associates		(11)	(9)
Net (investments in)/proceeds from sale of short-term investments		62	(687)
Net (investments in)/proceeds from sale of financial assets at fair value through other comprehensive income and amortised cost	25c	116	(6)
Dividends received from joint ventures and associates		26	42
Interest received		12	18
Net cash generated from/(used in) investing activities		6,171	2,398
Cash flows generated from/(used in) financing activities
Own shares purchased		(66)	(149)
Repayment of capital element of obligations under leases		(621)	(634)
Increase in borrowings		1,098	1,272
Repayment of borrowings		(1,814)	(1,756)
Net cash flows from derivative financial instruments	25c	(580)	(17)
Dividends paid to equity owners	8	(5,858)	(656)
Net cash generated from/(used in) financing activities		(7,841)	(1,940)
Net increase/(decrease) in cash and cash equivalents		(1,068)	506
Cash and cash equivalents at the beginning of the year		3,031	2,567
Effect of foreign exchange rate changes		8	(42)
Cash and cash equivalents including cash and overdrafts held in disposal groups at the end of the year		1,971	3,031
Cash and overdrafts held in disposal groups		7	-
Cash and cash equivalents at the end of the year	20	1,978	3,031

The notes on pages 35 to 108 form part of these financial statements.

(a) Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

(b) Refer to Note 1 for further details regarding the prior year restatement.

Notes to the Group financial statements

Note 1 Accounting policies, judgements and estimates

General information

Tesco PLC (the Company) is a public limited company incorporated and domiciled in England and Wales under the Companies Act 2006 (Registration number 445790). The address of the registered office is Tesco House, Shire Park, Kestrel Way, Welwyn Garden City, AL7 1GA, UK.

The main activities of the Company and its subsidiaries (together, the Group) are those of retailing and retail banking.

Basis of preparation

The consolidated Group financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and IFRS as issued by the International AccountingStandardsBoard. The consolidated Group financial statements are presented in Pounds Sterling, generally rounded to the nearest million. They are prepared on the historical cost basis, except for certain financial instruments, share-based payments and pension assets that have been measured at fair value.

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. The Directors have considered the potential impact of Brexit, the COVID-19 pandemic, a macroeconomic downturn and climate risk, and have concluded that there are no material uncertainties relating to going concern. Further information on the Group's strong liquidity position is given in the Financial review, Summary of total indebtedness section.

Unless otherwise stated, the accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

The Group has adopted the 'Definition of a business' amendment to IFRS 3, 'Business combinations' in the current financial year, and has applied its guidance when evaluating whether acquisitions in the period are asset acquisitions or business combinations. The Group early-adopted 'interest rate benchmark reform' phase 1 amendments in the prior year and has also early-adopted phase 2 amendments in the current year. The Group has elected not to apply the exemption granted in the 'COVID-19-related rent concessions' amendment to IFRS 16, 'Leases', as the Group has not received material COVID-19-related rent concessions as a lessee.

Other standards, interpretations and amendments effective in the current financial year have not had a material impact on the Group financial statements.

The Group has not applied any other standards, interpretations or amendments that have been issued but are not yet effective. The impact of the following is still under assessment:

- IFRS 17 'Insurance contracts'.

Other standards, interpretations and amendments issued but not yet effective are not expected to have a material impact on the Group financial statements.

Discontinued operations

During the year, the Board approved plans to dispose of the Group's operations in Thailand, Malaysia and Poland. The disposal of the Thailand and Malaysia operations completed on 18 December 2020, and the corporate sale of the Group's business in Poland completed after the balance sheet date on 16 March 2021. The assets and liabilities of the Group's Poland operation are presented separately in the Group balance sheet as a disposal group held for sale. Further properties in Poland not included in the corporate sale also individually meet the criteria to be classified as held for sale. The net results of the Group's operations in Thailand and Malaysia, up until disposal, and of the Group's entire business in Poland, are presented as discontinued operations in the Group income statement (for which the comparatives have been restated). See Note 7 for further details.

Income statement presentation

The Group now presents 'Impairment (loss)/reversal on financial assets' on a separate line on the face of the Group income statement, following a significant increase in expected credit losses in Tesco Bank in the year. Prior year comparatives have been reclassified. For further details, see Note 25.

Change in classification

On 1 March 2020, the Group's portfolio of debt investment securities measured at fair value through comprehensive income was reclassified to investment securities at amortised cost, measured using the effective interest rate method less allowance for expected credit losses. This was following a change in business model resulting from the sale of the Group's mortgage business which increased management's expectation that these debt investments would be held for the collection of contractual cash flows only. In the prior year, gains and losses arising from changes in fair value were recognised directly in other comprehensive income, except for impairment gains or losses, interest income and foreign exchange gains and losses, which were recognised in the Group income statement. For further details, see Note 16.

Notes to the Group financial statements

Note 1 Accounting policies, judgements and estimates continued
Prior year restatement

The consolidated financial statements include a prior year restatement in relation to the original accounting for deferred tax and the associated goodwill recognised on the business combination of three property partnerships in 2015/16. A reassessment of tax-related information from 2005 has identified a material difference in deferred tax. The Group has corrected this as a prior year error, as it concluded this information should reasonably have been available in 2016. The impact in the 29 February 2020 and 23 February 2019 balance sheets is to increase deferred tax assets by £157m (being a reduction in UK deferred tax liabilities) and reduce goodwill by £41m with a corresponding net £116m increase in net assets and retained earnings. There is no impact on the comparative period income statement or cash flow statement.

The consolidated financial statements also include a prior year restatement in relation to notional cash pooling arrangements where the intention to net settle cannot be clearly demonstrated. The Group has corrected prior year comparatives by grossing up cash and overdraft balances that had previously been offset on the balance sheet. The impact on the 29 February 2020 and 23 February 2019 balance sheets is an increase in both cash and overdraft balances of £729m and £1,311m respectively. As at 27 February 2021, the Group's notional cash pooling arrangements were physically settled where possible. All overdrafts including those subject to cash pooling arrangements are considered an integral part of the Group's cash management and so the cash flow statement has been restated to include all overdrafts in cash and cash equivalents on the cash flow statement (see Note 20). Previously, only overdrafts that were offset on the balance sheet were also included within cash and cash equivalents on the cash flow statement. The impact on the 29 February 2020 cash flow statement is to decrease cash and cash equivalent balances at the beginning of the year and at the end of the year by £349m and £377m respectively. There is no impact on the comparative period income statement, net debt or Total indebtedness.

Basis of consolidation

The consolidated Group financial statements consist of the financial statements of the ultimate Parent Company (Tesco PLC), all entities controlled by the Company (its subsidiaries) and the Group's share of its interests in joint ventures and associates.

The financial year represents the 52 weeks ended 27 February 2021 (prior financial year 53 weeks ended 29 February 2020). For the UK and the Republic of Ireland (UK & ROI), the results are for the 52 weeks ended 27 February 2021 (prior financial year 53 weeks ended 29 February 2020). For all other operations, the results are for the calendar year ended 28 February 2021 (prior calendar year ended 29 February 2020).

Subsidiaries

Subsidiaries are consolidated in the Group's financial statements from the date that control commences until the date that control ceases.

Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions are eliminated in preparing the consolidated financial statements.

Joint ventures and associates

The Group's share of the results of joint ventures and associates is included in the Group income statement and Group statement of comprehensive income/(loss) using the equity method of accounting. Investments in joint ventures and associates are carried in the Group balance sheet at cost plus post-acquisition changes in the Group's share of the net assets of the entity, less any impairment in value. The carrying values of investments in joint ventures and associates include acquired goodwill. If the Group's share of losses in a joint venture or associate equals or exceeds its investment in the joint venture or associate, the Group does not recognise further losses, unless it has incurred obligations to do so or made payments on behalf of the joint venture or associate. Dividends received from joint ventures or associates with nil carrying value are recognised in the Group income statement as part of the Group's share of post-tax profits/(losses) of joint ventures and associates.

Unrealised gains arising from transactions with joint ventures and associates are eliminated to the extent of the Group's interest in the entity.

Revenue

Revenue is income arising from the sale of goods and services in the ordinary course of the Group's activities, net of value added taxes. Revenue is recognised when performance obligations are satisfied and control has transferred to the customer. For the majority of revenue streams, there is a low level of judgement applied in determining the transaction price or the timing of transfer of control.

Sale of goods

The sale of goods represents the vast majority of the Group's revenue. For goods sold in store, revenue is recognised at the point of sale. For online or wholesale sales of goods, revenue is recognised on collection by, or delivery to, the customer. Revenue is reduced by a provision for expected returns (refund liability). An asset and corresponding adjustment to cost of sales is recognised for the Group's right to recover goods from customers.

Clubcard (customer loyalty programme)

Clubcard points issued by Tesco when a customer purchases goods are a separate performance obligation providing a material right to a future discount. The total transaction price (sales price of goods) is allocated to the Clubcard points and the goods sold based on their relative standalone selling prices, with the Clubcard points standalone price based on the value of the points to the customer, adjusted for expected redemption rates (breakage). The amount allocated to Clubcard points is deferred as a contract liability within trade and other payables. Revenue is recognised as the points are redeemed by the customer.

Notes to the Group financial statements

Note 1 Accounting policies, judgements and estimates continued

Financial services

Revenue consists of interest, fees and income from the provision of retail banking and insurance.

Interest income on financial assets that are measured at amortised cost is determined using the effective interest rate method. Calculation of the effective interest rate takes into account fees receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. Interest income is calculated on the gross carrying amount of a financial asset

unless the financial asset is impaired, in which case interest income is calculated on the amortised cost, after allowance for expected credit losses (ECLs).

The majority of the fees in respect of services (credit card interchange fees, late payment and ATM revenue) are recognised at the point in time at which the transaction with the customer takes place and the service is performed. For services performed over time, payment is generally due monthly in line with the satisfaction of performance obligations.

The Group generates commission from the sale and service of motor and home insurance policies underwritten by Tesco Underwriting Limited, or in a minority of cases by a third-party underwriter. This is based on commission rates, which are independent of the profitability of underlying insurance policies. Similar commission income is also generated from the sale of white label insurance products underwritten by other third-party providers. This commission income is recognised on a net basis as such policies are sold.

In the case of some commission income on insurance policies managed and underwritten by a third party, the Group recognises commission income from policy renewals as such policies are sold. This is when the Group has satisfied all of its performance obligations in relation to the policy sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods. This calculation takes into account both estimates of future renewal volumes and renewal commission rates. A contract asset is recognised in relation to this revenue. This is unwound over the remainder of the contract with the customer, in this case being the third-party insurance provider.

The end policy holders have the right to cancel an insurance policy at any time. Therefore, a contract liability is recognised for the amount of any expected refunds due and the revenue recognised in relation to these sales is reduced accordingly. This contract refund liability is estimated using prior experience of customer refunds. The appropriateness of the assumptions used in this calculation is reassessed at each reporting date.

Commercial income

Consistent with standard industry practice, the Group has agreements with suppliers whereby volume-related allowances, promotional and marketing allowances and various other fees and discounts are received in connection with the purchase of goods for resale from those suppliers. Most of the income received from suppliers relates to adjustments to a core cost price of a product, and as such is considered part of the purchase price for that product. Sometimes receipt of the income is conditional on the Group performing specified actions or satisfying certain performance conditions associated with the purchase of the product. These include achieving agreed purchases or sales volume targets and providing promotional or marketing materials and activities or promotional product positioning. While there is no standard industry definition, these amounts receivable from suppliers in connection with the purchase of goods for resale are generally termed commercial income.

Commercial income is recognised when earned by the Group, which occurs when all obligations conditional for earning income have been discharged, and the income can be measured reliably based on the terms of the contract. The income is recognised as a credit within cost of sales. Where the income earned relates to inventories which are held by the Group at the reporting date, the income is included within the cost of those inventories and recognised in cost of sales upon sale of those inventories.

Amounts due relating to commercial income are recognised within trade and other receivables, except in cases where the Group currently has a legally enforceable right of set-off and intends to offset amounts due from suppliers against amounts owed to those suppliers, in which case only the net amount receivable or payable is recognised. Accrued commercial income is recognised within accrued income when commercial income earned has not been invoiced at the reporting date.

Finance income

Finance income, excluding income arising from financial services, is recognised in the period to which it relates using the effective interest rate method.

Finance costs

Finance costs directly attributable to the acquisition or construction of qualifying assets are capitalised. Qualifying assets are those that necessarily take a substantial period of time to prepare for their intended use. All other borrowing costs are recognised in the Group income statement in finance costs, excluding those arising from financial services, in the period in which they occur. For Tesco Bank, finance cost on financial liabilities is determined using the effective interest rate method and is recognised in cost of sales.

Notes to the Group financial statements
Note 1 Accounting policies, judgements and estimates continued

Business combinations and goodwill

The Group accounts for all business combinations by applying the acquisition method. All acquisition-related costs are expensed.

On acquisition, the assets (including intangible assets), liabilities and contingent liabilities of an acquired entity are measured at their fair values. Non-controlling interests are stated at the non-controlling interests' proportion of the fair values of the assets and liabilities recognised.

Goodwill arising on consolidation represents the excess of the consideration transferred over the net fair value of the Group's share of the net assets, liabilities and contingent liabilities of the acquired subsidiary, joint venture or associate and the fair value of the non-controlling interest in the acquiree. If the consideration is less than the fair value of the Group's share of the net assets, liabilities and contingent liabilities of the acquired entity (i.e. a bargain purchase), 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 or groups of 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. 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.

Where the Group obtains control of a joint venture or associate, the Group's previously held interests in the acquired entity is remeasured to its acquisition date fair value and the resulting gain or loss, if any, is recognised in the Group income statement.

Cloud software licence agreements

Licence agreements to use cloud software are treated as service contracts and expensed in the Group income statement, unless the Group has both a contractual right to take possession of the software at any time without significant penalty, and the ability to run the software independently of the host vendor. In such cases the licence agreement is capitalised as software within intangible assets.

Intangible assets

Intangible assets, such as software, acquired customer relationships and pharmacy licences, are measured initially at acquisition cost or costs incurred to develop the asset. Intangible assets acquired in a business combination are recognised at fair value at the acquisition date.

Following initial recognition, intangible assets with finite useful lives are carried at cost less accumulated amortisation and accumulated impairment losses. They are amortised on a straight- line basis over their estimated useful lives of three to 10 years for software and up to 10 years for customer relationships.

Research costs are expensed as incurred. Development expenditure incurred on an individual project is capitalised only if specific criteria are met.

Property, plant and equipment

Property, plant and equipment is carried at cost less accumulated depreciation and any recognised impairment in value. Property, plant and equipment is depreciated on a straight-line basis to its residual value over its anticipated useful economic life:

- freehold buildings - 10 to 40 years; and

- fixtures and fittings, office equipment and motor vehicles - three to 20 years.

Impairment of non-financial assets

Goodwill is reviewed for impairment at least annually by assessing the recoverable amount of each cash-generating unit, or group of cash-generating units, to which the goodwill relates. For all other non-financial assets (including other intangible assets, property, plant and equipment, right of use assets and investment property) the Group performs impairment testing where there are indicators of impairment. 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 of disposal, and value in use. When the recoverable amount is less than the carrying amount, an impairment loss is recognised immediately in the Group income statement.

Goodwill impairments are not subsequently reversed. Where an impairment loss on other non-financial assets 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 immediately as a credit to the Group income statement.

Investment property

Investment property assets are carried at cost less accumulated depreciation and any recognised impairment in value. The depreciation policies for investment property are consistent with those described for property, plant and equipment.

Inventories

Inventories comprise goods and development properties held for resale. Inventories are valued at the lower of cost and fair value less costs to sell using the weighted average cost basis. Directly attributable costs and incomes (including applicable commercial income) are included in the cost of inventories.

Notes to the Group financial statements

Note 1 Accounting policies, judgements and estimates continued

Cash and cash equivalents

Cash and cash equivalents in the Group balance sheet consist of cash at bank and in hand, credit and debit card receivables, demand deposits with banks and short-term highly liquid investments with an original maturity of three months or less, for example short-term deposits, loans and advances to banks and certificates of deposits. Cash and cash equivalents in the Group cash flow statement also include overdrafts repayable on demand as they form an integral part of the Group's cash management.

Non-current assets held for sale and discontinued operations

Non-current assets (or disposal groups) are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell.

The net results of discontinued operations are presented separately in the Group income statement (and the comparatives restated).

Leases

The Group assesses whether a contract is, or contains, a lease at inception of the contract. A lease conveys the right to direct the use and obtain substantially all of the economic benefits of an identified asset for a period of time in exchange for consideration.

The Group as a lessee

A right of use asset and corresponding lease liability are recognised at commencement of the lease.

The lease liability is measured at the present value of the lease payments, discounted at the rate implicit in the lease, or if that cannot be readily determined, at the lessee's incremental borrowing rate specific to the term, country, currency and start date of the lease. Lease payments include: fixed payments; variable lease payments dependent on an index or rate, initially measured using the index or rate at commencement; the exercise price under a purchase option if the Group is reasonably certain to exercise; penalties for early termination if the lease term reflects the Group exercising a break option; and payments in an optional renewal period if the Group is reasonably certain to exercise an extension option or not exercise a break option.

The lease liability is subsequently measured at amortised cost using the effective interest rate method. It is remeasured, with a corresponding adjustment to the right of use asset, when there is a change in future lease payments resulting from a rent review, change in an index or rate such as inflation, or change in the Group's assessment of whether it is reasonably certain to exercise a purchase, extension or break option.

The right of use asset is initially measured at cost, comprising: the initial lease liability; any lease payments already made less any lease incentives received; initial direct costs; and any dilapidation or restoration costs. The right of use asset is subsequently depreciated on a straight-line basis over the shorter of the lease term or the useful life of the underlying asset. The right of use asset is tested for impairment if there are any indicators of impairment.

Leases of low value assets (value when new less than £5,000) and short-term leases of 12 months or less are expensed to the Group income statement, as are variable payments dependent on performance or usage, 'out of contract' payments and non-lease service components.

The Group as a lessor

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Where the Group is an intermediate lessor, the sublease classification is assessed with reference to the head lease right of use asset. Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group's net investment in the lease. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group's net investment in the lease. Rental income from operating leases is recognised on a straight-line basis over the term of the lease.

Sale and leaseback

A sale and leaseback transaction is where the Group sells an asset and immediately reacquires the use of the asset by entering into a lease with the buyer. A sale occurs when control of the underlying asset passes to the buyer. A lease liability is recognised, the associated property, plant and equipment asset is derecognised, and a right of use asset is recognised at the proportion of the carrying value relating to the right retained. Any gain or loss arising relates to the rights transferred to the buyer.

Post-employment obligations

For defined benefit plans, obligations are measured at discounted present value (using the projected unit credit method) and plan assets are recorded at fair value.

The operating and financing costs of such plans are recognised separately in the Group income statement; service costs are spread systematically over the expected service lives of employees and financing costs are recognised in the periods in which they arise. Actuarial gains and losses are recognised immediately in the Group statement of comprehensive income/(loss).

Payments to defined contribution schemes are recognised as an expense as they fall due.

Notes to the Group financial statements

Note 1 Accounting policies, judgements and estimates continued

Share-based payments

The fair value of employee share option plans, which are all equity-settled, is calculated at the grant date using the Black- Scholes or Monte Carlo model. The resulting cost is charged to the Group income statement over the vesting period. The value of the charge is adjusted to reflect expected and actual levels of vesting.

Taxation

The tax expense included in the Group income statement consists of current and deferred tax.

Current tax is the expected tax payable on the taxable income for the financial year, using tax rates enacted or substantively enacted by the balance sheet date. Tax expense is recognised in the Group income statement except to the extent that it relates to items recognised in the Group statement of comprehensive income/ (loss) or directly in the Group statement of changes in equity, in which case it is recognised in the Group statement of comprehensive income/(loss) or directly in the Group statement of changes in equity, respectively.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset realised based on the tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited in the Group income statement, except when it relates to items charged or credited directly to the Group statement of changes in equity or the Group statement of comprehensive income/(loss), in which case the deferred tax is also recognised in equity, or other comprehensive income, respectively.

Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered.

Deferred tax assets and liabilities are offset against each other when there is a legally enforceable right to set off current taxation assets against current taxation liabilities and it is the intention to settle these on a net basis.

Tax provisions are recognised for uncertain tax positions where a risk of an additional tax liability has been identified and it is probable that the Group will be required to settle that tax. Measurement is dependent on management's expectation of the outcome of decisions by tax authorities in the various tax jurisdictions in which the Group operates. This is assessed on a case-by-case basis using in-house tax experts, professional firms and previous experience. Refer to Note 6.

Foreign currencies

The consolidated financial statements are presented in Pounds Sterling, which is the ultimate Parent Company's functional currency.

Transactions in foreign currencies are translated to the functional currency at the exchange rate on the date of the transaction.

At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated to the functional currency at the rates prevailing at the balance sheet date. Exchange differences are recognised in the Group income statement in the period in which they arise, apart from exchange differences on transactions entered into to hedge certain foreign currency risks, and exchange differences on monetary items forming part of the net investment in a foreign operation.

The assets and liabilities of the Group's foreign operations are translated into Pounds Sterling at exchange rates prevailing at the balance sheet date. Profits and losses are translated at average exchange rates for the relevant accounting periods. Exchange differences arising are recognised in the Group statement of comprehensive income/(loss) and are included in the Group's translation reserve. Such translation differences are recognised as income or expenses in the period in which the operation is disposed of.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Financial instruments

Financial assets and financial liabilities are recognised in the Group balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets are classified as either fair value through profit or loss, fair value through other comprehensive income, or amortised cost. Classification and subsequent remeasurement depends on the Group's business model for managing the financial asset and its cash flow characteristics. Assets that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest, are measured at amortised cost.

Notes to the Group financial statements

Note 1 Accounting policies, judgements and estimates continued

Trade receivables

Trade receivables are non interest-bearing and are recognised initially at fair value, or at transaction price if there is not a significant financing component. They are subsequently held at amortised cost using the effective interest rate method, less allowance for ECLs.

Investments

Investment securities at amortised cost are measured at amortised cost, using the effective interest rate method less allowance for ECLs.

Equity investments have been irrevocably designated at fair value through other comprehensive income. Gains and losses arising from changes in fair value are recognised directly in other comprehensive income, and are not subsequently reclassified to the Group income statement, including on derecognition. Impairment losses are not recognised separately from other changes in fair value. Dividends are recognised in the Group income statement when the Group's right to receive payment is established.

Loans and advances to customers and banks

Loans and advances are initially recognised at fair value plus directly related transaction costs. Subsequent to initial recognition, these assets are carried at amortised cost using the effective interest method less any allowance for ECLs.

Impairment of financial assets

The Group assesses on a forward-looking basis the ECLs associated with its financial assets carried at amortised cost. The ECLs are updated at each reporting date to reflect changes in credit risk.

The three-stage model for impairment has been applied to loans and advances to customers, investment securities at amortised cost, short-term investments and loan receivables from joint ventures and associates. The credit risk is determined through modelling a range of possible outcomes for different loss scenarios, using reasonable and supportable information about past events, current conditions and forecasts of future events and economic conditions and taking into account the time value of money. A 12-month ECL is recognised, unless the credit risk on the financial asset increases significantly after initial recognition, when the lifetime ECL is recognised.

For trade receivables, contract assets and lease receivables, the Group applies the simplified approach permitted by IFRS 9 'Financial instruments', with lifetime ECLs recognised from initial recognition of the receivable. These assets are grouped, based on shared credit risk characteristics and days past due, with ECLs for each grouping determined based on the Group's historical credit loss experience, adjusted for factors specific to each receivable, general economic conditions and expected changes in forecast conditions.

Interest-bearing borrowings

Interest-bearing bank loans and overdrafts are initially recorded at fair value, net of attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between proceeds and redemption value being recognised in the Group income statement over the period of the borrowings on an effective interest basis.

Trade payables

Trade payables are non interest-bearing and are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

Equity instruments

Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Derivative financial instruments and hedge accounting

The Group uses derivative financial instruments to hedge its exposure to foreign exchange, inflation, interest rate and commodity risks arising from operating, financing and investing activities. The Group does not hold or issue derivative financial instruments for trading purposes.

Derivative financial instruments are recognised and stated at fair value. Where derivatives do not qualify for hedge accounting, any gains or losses on remeasurement are immediately recognised in the Group income statement. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the hedge relationship and the item being hedged.

At inception of designated hedging relationships, the Group documents the risk management objective and strategy for undertaking the hedge, the nature of the risks being hedged and the economic relationship between the item being hedged and the hedging instrument, including whether the change in cash flows of the hedged item and hedging instrument are expected to offset each other.

As permitted under IFRS 9, the Group has elected to continue to apply the existing hedge accounting requirements of IAS 39 'Financial instruments: Recognition and measurement' for its portfolio hedge accounting until a new macro hedge accounting standard is implemented.

Derivative financial instruments with maturity dates of more than one year from the reporting date are disclosed as non-current.

Notes to the Group financial statements

Note 1 Accounting policies, judgements and estimates continued

Fair value hedging

Derivative financial instruments are classified as fair value hedges when they hedge the Group's exposure to changes in the fair value of a recognised asset or liability. Changes in the fair value of derivatives that are designated as fair value hedges are recognised in the Group income statement within finance income or costs, together with any changes in the fair value of the hedged item that is attributable to the hedged risk.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to the Group income statement over the remaining period to maturity.

Cash flow hedging

Derivative financial instruments are classified as cash flow hedges when they hedge the Group's exposure to variability in cash flows that are either attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecasted transaction. The effective element of any gain or loss from remeasuring the derivative designated as the hedging instrument is recognised directly in other comprehensive income and accumulated in the hedging reserve. Any cost of hedging, such as the change in fair value related to forward points and currency basis adjustment is separately accumulated in the cost of hedging reserve. The ineffective element is recognised immediately in the Group income statement within finance income or costs.

Where the hedged item subsequently results in the recognition of a non-financial asset such as inventory, the amounts accumulated in the hedging reserve and cost of hedging reserve are included in the initial cost of the asset. For all other cash flow hedges, the amounts accumulated in the hedging reserve and cost of hedging reserve are recognised in the Group income statement when the hedged item or transaction affects the Group income statement.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised or no longer meets the Group's risk management objective. The cumulative gain or loss in the hedging reserve and cost of hedging reserve remains until the forecast transaction occurs or the original hedged item affects the Group income statement. If a forecast hedged transaction is no longer expected to occur, the cumulative gain or loss in the hedging reserve and cost of hedging reserve is reclassified to the Group income statement.

Net investment hedging

Financial instruments are classified as net investment hedges when they hedge the Group's net investment in an overseas operation. The effective element of any foreign exchange gain or loss from remeasuring the instrument is recognised directly in other comprehensive income and accumulated in the translation reserve in equity. Any ineffective element is recognised immediately in the Group income statement. Gains and losses accumulated in the translation reserve are reclassified to the Group income statement when the foreign operation is disposed of.

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the Group balance sheet when there is a current legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

Provisions

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. Provisions for onerous contracts are recognised when the Group believes that the unavoidable costs of meeting or exiting the contract exceed the economic benefits expected to be received under the contract.

Supplier financing arrangements

Suppliers can choose to access supplier financing arrangements provided by different third-party banks in different countries. Commercial requirements, including payment terms or the price paid for goods, do not depend on whether a supplier chooses to access such arrangements. The arrangements support our suppliers by giving them the option to access funding early, often at a lower cost than they could obtain themselves.

Under the arrangements, suppliers may choose to access payment early rather than on our normal payment terms, at a funding cost to the supplier that is set by the provider banks but based on Tesco's credit risk and the appropriate country risk premium. If suppliers choose not to access early payment, the provider banks pay the suppliers on our normal payment terms. The Group pays the provider banks on our normal payment terms, regardless of whether the supplier has chosen to access funding early.

Management reviews supplier financing arrangements to determine the appropriate presentation of balances outstanding as trade payables or borrowings, dependent on the nature of each arrangement. Factors considered in determining the appropriate presentation include the commercial rationale for the arrangement, impact on the Group's working capital positions, credit enhancements or other benefits provided to the bank and recourse exposures.

Balances outstanding under current supplier financing arrangements are classified as trade payables, and cash flows are included in operating cash flows, since the financing arrangements are agreed between the supplier and the banks, and the Group does not provide additional credit enhancement nor obtain any working capital benefit from the arrangements. Refer to Note 21.

Notes to the Group financial statements

Note 1 Accounting policies, judgements and estimates continued

Alternative performance measures (APMs)

In the reporting of financial information, the Directors have adopted various APMs. Refer to the Glossary for a full list of the Group's APMs, including comprehensive definitions, their purpose, reconciliations to IFRS measures and details of any changes to APMs.

Judgements and sources of estimation uncertainty

The preparation of the consolidated Group financial statements requires management to make judgements, estimates and assumptions in applying the Group's accounting policies to determine the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis, with revisions to accounting estimates applied prospectively.

Critical accounting judgements

Critical judgements, apart from those involving estimations, that are applied in the preparation of the consolidated financial statements are discussed below:

Leases

Management exercises judgement in determining the likelihood of exercising break or extension options in determining the lease term. Break and extension options are included to provide operational flexibility should the economic outlook for an asset be different to expectations, and hence at commencement of the lease, break or extension options are not typically considered reasonably certain to be exercised, unless there is a valid business reason otherwise.

The discount rate used to calculate the lease liability is the rate implicit in the lease, if it can be readily determined, or the lessee's incremental borrowing rate if not. Management uses the rate implicit in the lease where the lessor is a related party (such as leases from joint ventures) and the lessee's incremental borrowing rate for all other leases. Incremental borrowing rates are determined monthly and depend on the term, country, currency and start date of the lease. The incremental borrowing rate is determined based on a series of inputs including: the risk-free rate based on government bond rates; a country-specific risk adjustment; a credit risk adjustment based on Tesco bond yields; and an entity-specific adjustment where the entity risk profile is different to that of the Group.

Refer to Note 12 for additional disclosures relating to leases.

Joint ventures and associates

The Group has assessed the nature of its joint arrangements under IFRS 11 'Joint Arrangements' and determined them to be joint ventures. These assessments required the exercise of judgement as set out in Note 14.

APMs - Exceptional items

Exceptional items relate to certain costs or incomes that derive from events or transactions that fall within the normal activities of the Group but which, individually or, if of a similar type, in aggregate, are excluded from the Group's APMs by virtue of their size and nature in order to better reflect management's view of the underlying trends, performance and position of the Group.

Management exercises judgement in determining the adjustments to apply to IFRS measurements, and this assessment covers the nature of the item, cause of occurrence and the scale of impact of that item on reported performance. Reversals of previous exceptional items are assessed based on the same criteria.

An analysis of the exceptional items included in the Group income statement, together with the impact of these items on the Group cash flow statement, is disclosed in Note 4.

Refer to pages 125 to 132 for further details on the Group's APMs.

Key sources of estimation uncertainty

The key assumptions about the future, and other key sources of estimation uncertainty at the reporting period end that may have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below:

Post-employment benefit obligations

The present value of post-employment benefit obligations is determined on an actuarial basis using various assumptions, including the discount rate, inflation rate and mortality assumptions. Any changes in these assumptions will impact the carrying amount as well as the net pension cost/(income). Key assumptions and sensitivities for post-employment benefit obligations are disclosed in Note 29.

Notes to the Group financial statements

Note 1 Accounting policies, judgements and estimates continued

Impairment of non-financial assets

The Group treats each store as a separate cash-generating unit for impairment testing. The Group allocates goodwill to groups of cash-generating units, where each country represents a group of cash-generating units for the Group's retail operations, and Tesco Bank represents a separate cash-generating unit.

Recoverable amounts for cash-generating units are the higher of fair value less cost of disposal, and value in use.

Value in use is calculated from cash flow projections based on the Group's three-year internal forecasts. The forecasts are extrapolated to five years based on management's expectations, and beyond five years based on estimated long-term growth rates. Fair value is determined with the assistance of independent, professional valuers where appropriate. Key estimates and sensitivities are disclosed in Note 15.

Tesco Bank ECL measurement

The measurement of ECLs for Tesco Bank financial assets requires the use of complex models and significant assumptions about future macroeconomic conditions and credit behaviour, such as the likelihood of customers defaulting and the resulting losses. Key assumptions and sensitivities for Tesco Bank ECLs are disclosed in Note 25.

Contingent liabilities

Contingent liabilities are possible obligations whose existence will be confirmed only on the occurrence or non-occurrence of uncertain future events outside the Group's control, or present obligations that are not recognised because it is not probable that a settlement will be required or the value of such a payment cannot be reliably estimated. The Group does not recognise contingent liabilities but discloses them. Refer to Note 34 for the disclosures.

Other significant estimates

Commercial income

Management is required to make estimates in determining the amount and timing of recognition of commercial income for some transactions with suppliers. In determining the amount of volume-related allowances recognised in any period, management estimates the probability that the Group will meet contractual target volumes, based on historical and forecast performance. There is limited estimation involved in recognising income for promotional and other allowances.

Management assesses its performance against the obligations conditional on earning the income, with the income recognised either over time as the obligations are met or recognised at the point when all obligations are met, dependent on the contractual requirements. Commercial income is recognised as a credit within cost of sales. Where the income earned relates to inventories which are held by the Group at period ends, the income is included within the cost of those inventories and recognised in cost of sales upon sale of those inventories. Management views that the cost of inventories sold (which is inclusive of commercial income) provides a consistent and complete measure of the Group income statement impact of the overall supplier relationships.

Management considers the best indicator of the estimation undertaken is by reference to commercial income balances not settled at the balance sheet date and has therefore provided additional disclosures of commercial income amounts reflected in the Group balance sheet. Management believes there is limited risk of a material change in the amounts recognised in the next financial year. Refer to Note 22 for commercial income disclosures.

Notes to the Group financial statements

Note 2 Segmental reporting

The Group's operating segments are determined based on the Group's internal reporting to the Chief Operating Decision Maker (CODM). The CODM has been determined to be the Group Chief Executive, with support from the Executive Committee, as the function primarily responsible for the allocation of resources to segments and assessment of performance of the segments.

The Group's operations in Thailand, Malaysia and Poland have been classified as discontinued operations as described in more detail in Notes 1 and 7. The segment results do not include these discontinued operations and intercompany recharges previously reported between continuing and discontinued operations have been eliminated in both the current and prior year.

Following the presentation of the Group's operations in Thailand and Malaysia as discontinued operations, the Group no longer presents Asia as a separate reportable segment. The remaining operations previously reported within the Asia segment, which consist of our Trent Hypermarket joint venture, have been reclassified to the UK & ROI segment. The comparatives for UK & ROI have also been reclassified to include the China associate Gain Land, which the Group sold on 28 February 2020 and which was previously included within the Asia segment. As a result of this, the Group has reclassified £(7)m of operating costs before exceptional items and amortisation of acquired intangibles, and £(7)m of exceptional items to the UK & ROI segment income statement for the year ended 29 February 2020. The Group has also reclassified £59m of investments in joint ventures and associates and £22m of current tax assets as at 29 February 2020 to the UK & ROI segment balance sheets.

The principal activities of the Group are therefore presented in the following segments:

- Retailing and associated activities (Retail) in:

- UK & ROI - the United Kingdom and Republic of Ireland; and

- Central Europe - Czech Republic, Hungary and Slovakia.

- Retail banking and insurance services through Tesco Bank in the UK (Tesco Bank).

This presentation reflects how the Group's operating performance is reviewed internally by management.

The CODM uses operating profit/(loss) before exceptional items and amortisation of acquired intangibles, as reviewed at monthly Executive Committee meetings, as the key measure of the segments' results as it reflects the segments' underlying performance for the financial year under evaluation. Operating profit/(loss) before exceptional items and amortisation of acquired intangibles is a consistent measure within the Group as defined within the Glossary. Refer to Note 4 for exceptional items and amortisation of acquired intangibles. Inter-segment revenue between the operating segments is not material.

Income statement

The segment results and the reconciliation of the segment measures to the respective statutory items included in the Group income statement are as follows:

52 weeks ended 27 February 2021 At constant exchange rates	UK & ROI £m	Central Europe £m	Tesco Bank £m	Total at constant exchange £m	Foreign exchange £m	Total at actual exchange £m
Continuing operations
Group sales	48,780	3,919	735	53,434	11	53,445
Revenue	53,102	4,038	735	57,875	12	57,887
Operating profit/(loss) before exceptional items and amortisation of acquired intangibles	1,861	125	(175)	1,811	4	1,815
Exceptional items and amortisation of acquired intangibles	213	2	(295)	(80)	1	(79)
Operating profit/(loss)	2,074	127	(470)	1,731	5	1,736
Operating margin	3.5%	3.1%	(23.8)%	3.1%		3.1%

52 weeks ended 27 February 2021 At actual exchange rates			UK & ROI £m	Central Europe £m	Tesco Bank £m	Total at actual exchange £m
Continuing operations
Group sales			48,848	3,862	735	53,445
Revenue			53,170	3,982	735	57,887
Operating profit/(loss) before exceptional items and amortisation of acquired intangibles			1,866	124	(175)	1,815
Exceptional items and amortisation of acquired intangibles			213	3	(295)	(79)
Operating profit/(loss)			2,079	127	(470)	1,736
Operating margin			3.5%	3.1%	(23.8)%	3.1%
Share of post-tax profits/(losses) of joint ventures and associates						26
Finance income						15
Finance costs						(952)
Profit/(loss) before tax						825

Notes to the Group financial statements

Note 2 Segmental reporting continued

53 weeks ended 29 February 2020 At actual exchange rates	UK & ROI £m	Central Europe £m	Tesco Bank £m	Total at actual exchange £m
Continuing operations
Group sales*	45,752	3,968	1,068	50,788
Revenue	52,898	4,125	1,068	58,091
Operating profit/(loss) before exceptional items and amortisation of acquired intangibles*	2,202	176	193	2,571
Exceptional items and amortisation of acquired intangibles	(279)	33	(119)	(365)
Operating profit/(loss)	1,923	209	74	2,206
Operating margin*	4.2%	4.3%	18.1%	4.4%
Share of post-tax profits/(losses) of joint ventures and associates				(8)
Finance income				20
Finance costs				(1,190)
Profit/(loss) before tax				1,028

* Refer to page 129 for a reconciliation from Group sales, Operating profit before exceptional items and amortisation of acquired intangibles and Operating margin shown above to the Group's 52-week alternative performance measures for the year ended 29 February 2020.

Tesco Bank revenue of £735m (2020: £1,068m) comprises interest and similar revenues of £542m (2020: £733m) and fees and commissions revenue of £193m (2020: £335m).

Balance sheet

The following tables showing segment assets and liabilities exclude those balances that make up net debt (cash and cash equivalents,

short-term investments, joint venture loans and other receivables, bank and other borrowings, lease liabilities, derivative financial instruments and net debt of the disposal group). With the exception of lease liabilities which have been allocated to each segment, all other components of net debt have been included within the unallocated segment to reflect how the Group manages these balances. Intercompany transactions have been eliminated other than intercompany transactions with Tesco Bank in net debt.

At 27 February 2021	UK & ROI £m	Central Europe £m	Tesco Bank £m	Unallocated £m	Total Continuing operations £m	Discontinued operations £m	Total £m
Goodwill and other intangible assets	4,750	32	611	-	5,393	-	5,393
Property, plant and equipment and investment property	15,397	1,768	65	-	17,230	-	17,230
Right of use assets	5,571	368	12	-	5,951	-	5,951
Investments in joint ventures and associates	84	1	93	-	178	-	178
Non-current financial assets at fair value through other comprehensive income(a)	9	-	2	-	11	-	11
Non-current investment securities at amortised cost^(a)	-	-	752	-	752	-	752
Non-current trade and other receivables(b)	97	-	52	-	149	-	149
Non-current loans and advances to customers and banks	-	-	3,309	-	3,309	-	3,309
Deferred tax assets	460	25	67	-	552	-	552
Non-current assets(c)	26,368	2,194	4,963	-	33,525	-	33,525
Inventories and current trade and other receivables(d)(e)	2,684	325	222	-	3,231	-	3,231
Current loans and advances to customers and banks	-	-	3,093	-	3,093	-	3,093
Current financial assets at fair value through other comprehensive income(a)	-	-	3	-	3	-	3
Current investment securities at amortised cost(a)	-	-	175	-	175	-	175
Total trade and other payables	(7,797)	(495)	(216)	-	(8,508)	-	(8,508)
Total customer deposits and deposits from banks	-	-	(6,338)	-	(6,338)	-	(6,338)
Total provisions	(224)	(22)	(59)	-	(305)	-	(305)
Deferred tax liabilities	(9)	(39)	-	-	(48)	-	(48)
Net current tax	(79)	5	36	-	(38)	-	(38)
Post-employment benefits	(1,222)	-	-	-	(1,222)	-	(1,222)
Assets of the disposal group and non-current assets classified as held for sale	53	-	-	-	53	552	605
Liabilities of the disposal group classified as held for sale	-	-	-	-	-	(276)	(276)
Net debt (including Tesco Bank)(f)(g)	(7,879)	(493)	242	(3,442)	(11,572)	-	(11,572)
Net assets	11,895	1,475	2,121	(3,442)	12,049	276	12,325

(a) Refer to Note 1.

(b) Excludes loans to joint ventures of £21m (2020: £23m) which form part of net debt.

(d) Excludes net interest and other receivables of £nil (2020: £1m) which form part of net debt.

(e) Excludes loans to joint ventures of £101m (2020: £104m) which form part of net debt.

(f) Refer to Note 32.

(g) Net debt (including Tesco Bank) at 27 February 2021 excludes Net debt of the disposal groups classified as held for sale of £(141)m.

Notes to the Group financial statements

Note 2 Segmental reporting continued

	UK & ROI	Central Europe	Tesco Bank	Unallocated	Total Continuing operations	Discontinued operations	Total
At 29 February 2020 (restated)	£m	£m	£m	£m	£m	£m	£m
Goodwill and other intangible assets	4,851	25	914	-	5,790	288	6,078
Property, plant and equipment and investment property	14,635	1,826	61	-	16,522	2,738	19,260
Right of use assets	5,719	392	14	-	6,125	749	6,874
Investments in joint ventures and associates	70	1	87	-	158	149	307
Non-current financial assets at fair value through other comprehensive income(a)	7	-	859	-	866	-	866
Non-current trade and other receivables(b)	65	-	65	-	130	13	143
Non-current loans and advances to customers and banks	-	-	4,171	-	4,171	-	4,171
Deferred tax assets	286	33	69	-	388	61	449
Non-current assets(c)	25,633	2,277	6,240	-	34,150	3,998	38,148
Inventories and current trade and other receivables (d)(e)	2,678	314	252	-	3,244	480	3,724
Current loans and advances to customers and banks	-	-	4,280	-	4,280	-	4,280
Current financial assets at fair value through other comprehensive income(a)	-	-	202	-	202	-	202
Total trade and other payables	(7,215)	(511)	(249)	-	(7,975)	(1,117)	(9,092)
Total customer deposits and deposits from banks	-	-	(8,207)	-	(8,207)	-	(8,207)
Total provisions	(161)	(11)	(57)	-	(229)	(63)	(292)
Deferred tax liabilities	(4)	(36)	-	-	(40)	-	(40)
Net current tax	(248)	9	(26)	-	(265)	(38)	(303)
Post-employment benefits	(3,056)	-	-	-	(3,056)	(29)	(3,085)
Assets of the disposal groups and non-current assets classified as held for sale	75	-	45	-	120	165	285
Net debt (including Tesco Bank)(f)	(8,203)	(497)	47	(3,167)	(11,820)	(431)	(12,251)
Net assets	9,499	1,545	2,527	(3,167)	10,404	2,965	13,369
(a)-(g) Refer to previous table for footnotes.
Other segment information

52 weeks ended 27 February 2021	UK & ROI £m	Central Europe £m	Tesco Bank m	Total Continuing operations £m	Discontinued operations £m	Total £m
Capital expenditure (including acquisitions through business combinations):
Property, plant and equipment(a)(b)	1,466	79	15	1,560	2	1,562
Goodwill and other intangible assets(c)	156	10	40	206	-	206
Depreciation and amortisation:
Property, plant and equipment	(799)	(99)	(9)	(907)	(14)	(921)
Right of use assets	(522)	(37)	(2)	(561)	(5)	(566)
Investment property	(1)	-	-	(1)	-	(1)
Other intangible assets	(225)	(7)	(46)	(278)	(1)	(279)
Impairment(d)
(Loss)/reversal on financial assets	(23)	(1)	(360)	(384)	(2)	(386)

53 weeks ended 29 February 2020	£m	£m	m	£m	£m	£m
Capital expenditure (including acquisitions through business combinations):
Property, plant and equipment(a)(b)	1,674	90	7	1,771	135	1,906
Goodwill and other intangible assets(c)	145	12	44	201	6	207
Depreciation and amortisation:
Property, plant and equipment	(771)	(98)	(9)	(878)	(260)	(1,138)
Right of use assets	(537)	(32)	(2)	(571)	(80)	(651)
Investment property	(1)	-	-	(1)	-	(1)
Other intangible assets	(218)	(11)	(130)	(359)	(8)	(367)
Impairment(d)
(Loss)/reversal onfinancialassets	(4)	-	(179)	(183)	3	(180)

(a) Includes £476m related to obtaining control of The Tesco Property (No. 2) Limited Partnership (2020: £914m related to obtaining control of The Tesco Atrato Limited Partnership). Refer to Note 33 for further details.

(b) Includes £12m (2020: £nil) of property, plant and equipment acquired through business combinations.

(d) Refer to Note 15 for impairment of non-current assets.

Notes to the Group financial statements
Note 2 Segmental reporting continued
Cash flow statement

The following tables provide further analysis of the Group cash flow statement, including a split of cash flows between Retail continuing operations and Tesco Bank as well as an analysis of Group continuing and discontinued operations.

	Retail			Bank			Tesco Group
52 weeks ended 27 February 2021	Before exceptional items and amortisation of acquired intangibles £m	Exceptional items and amortisation of acquired intangibles £m	Retail Total £m	Before exceptional items and amortisation of acquired intangibles £m	Exceptional items and amortisation of acquired intangibles £m	Tesco Bank Total £m	Total m
Continuing operations
Operating profit/(loss) of continuing operations	1,990	216	2,206	(175)	(295)	(470)	1,736
Depreciation and amortisation	1,614	76	1,690	57	-	57	1,747
ATM net income	(13)	-	(13)	13	-	13	-
(Profit)/loss arising on sale of property, plant and equipment, investment property, intangible assets, assets held for sale and early termination of leases	(47)	(150)	(197)	2	-	2	(195)
(Profit)/loss arising on sale of financial assets	-	-	-	-	-	-	-
(Profit)/loss arising on sale of joint ventures and associates	-	(29)	(29)	-	-	-	(29)
Net impairment loss/(reversal) on property, plant and equipment, right of use assets, intangible assets and investment property	(4)	(124)	(128)	-	-	-	(128)
Impairment of goodwill	-	-	-	-	295	295	295
Impairment of joint ventures	-	-	-	-	-	-	-
Adjustment for non-cash element of pensions charge	7	7	14	-	-	-	14
Other defined benefit pension scheme payments	(351)	(2,500)	(2,851)	-	-	-	(2,851)
Share-based payments	31	-	31	(3)	-	(3)	28
Tesco Bank fair value movements included in operating profit/(loss)	-	-	-	367	-	367	367
Cash flows generated from operations excluding working capital	3,227	(2,504)	723	261	-	261	984
(Increase)/decrease in working capital	450	(11)	439	(133)	(19)	(152)	287
Cash generated from/(used in) operations^(a)	3,677	(2,515)	1,162	128	(19)	109	1,271
Interest paid	(680)	-	(680)	(6)	-	(6)	(686)
Corporation tax paid	(161)	-	(161)	(9)	-	(9)	(170)
Net cash generated from/(used in) operating activities	2,836	(2,515)	321	113	(19)	94	415
Proceeds from sale of property, plant and equipment, investment property, intangible assets and assets classified as held for sale	33	148	181	-	51	51	232
Purchase of property, plant and equipment and investment property - store buybacks	(239)	(52)	(291)	-	-	-	(291)
Purchase of property, plant and equipment and investment property - other capital expenditure	(740)	-	(740)	(21)	-	(21)	(761)
Purchase of intangible assets	(162)	-	(162)	(40)	-	(40)	(202)
Disposal of subsidiaries, net of cash disposed	-	7,806	7,806	-	-	-	7,806
Acquisition of businesses, net of cash acquired	15	-	15	-	-	-	15
Disposal of associate	-	-	-	-	-	-	-
Net (increase)/decrease in loans to joint ventures and associates	(2)	-	(2)	-	-	-	(2)
Investments in joint ventures and associates	(11)	-	(11)	-	-	-	(11)
Net (investments in)/proceeds from sale of short-term investments	62	-	62	-	-	-	62
Net (investments in)/proceeds from sale of financial assets at fair value through other comprehensive income and amortised cost	(1)	-	(1)	117	-	117	116
Dividends received from joint ventures and associates	10	-	10	7	-	7	17
Dividends received from Tesco Bank	13	-	13	(13)	-	(13)	-
Interest received	10	-	10	-	-	-	10
Net cash generated from/(used in) investing activities	(1,012)	7,902	6,890	50	51	101	6,991
Own shares purchased	(66)	-	(66)	-	-	-	(66)
Repayment of capital element of obligations under leases	(561)	-	(561)	(3)	-	(3)	(564)
Add/(less): Cash inflow from major disposal	-	(5,337)	(5,337)	-	-	-	(5,337)
Less: Net increase/(decrease) in loans to joint ventures and associates	2	-	2	-	-	-	2
Less: Net investments in/(proceeds from sale of) short-term investments	(62)	-	(62)	-	-	-	(62)
Free cash flow^(b)	1,137	50	1,187	160	32	192	1,379
Increase in borrowings	1,097	-	1,097	1	-	1	1,098
Repayment of borrowings	(1,039)	-	(1,039)	(775)	-	(775)	(1,814)
Net cash flows from derivative financial instruments	(632)	52	(580)	-	-	-	(580)
Dividends paid to equity holders	(942)	(4,916)	(5,858)	-	-	-	(5,858)
Net cash generated from/(used in) financing activities	(2,143)	(4,864)	(7,007)	(777)	-	(777)	(7,784)
Net increase/(decrease) in cash and cash equivalents from continuing operations	(319)	523	204	(614)	32	(582)	(378)
Net increase/(decrease) in cash and cash equivalents from discontinued operations	38	(728)	(690)	-	-	-	(690)
Intra-Group funding and intercompany transactions	-	2	2	(2)	-	(2)	-
Net increase/(decrease) in cash and cash equivalents	(281)	(203)	(484)	(616)	32	(584)	(1,068)
Cash and cash equivalents at the beginning of the year			1,667			1,364	3,031
Effect of foreign exchange rate changes			8			-	8
Cash and cash equivalents at the end of the year			1,191			780	1,971
Cash and overdrafts held in disposal groups			7			-	7
Cash and cash equivalents not held in disposal groups			1,198			780	1,978

(a) APM: 'Retail operating cash flow' of £1,162m (2020: £3,580m) is the cash generated from operations of the continuing Retail business.

(b) Free cash flow of £1,187m (2020: £1,493m) is reported on a continuing operations basis.

Notes to the Group financial statements

Note 2 Segmental reporting continued

Cash flow statement continued

	Retail			Bank			Tesco Group
53 weeks ended 29 February 2020 (restated^(d))	Before exceptional items and amortisation of acquired intangibles £m	Exceptional items and amortisation of acquired intangibles £m	Retail Total £m	Before exceptional items and amortisation of acquired intangibles £m	Exceptional items and amortisation of acquired intangibles £m	Tesco Bank Total £m	Total £m
Continuing operations
Operating profit/(loss) of continuing operations	2,378	(246)	2,132	193	(119)	74	2,206
Depreciation and amortisation	1,589	79	1,668	77	64	141	1,809
ATM net income	(34)	-	(34)	34	-	34	-
(Profit)/loss arising on sale of property, plant and equipment, investment property, intangible assets, assets held for sale and early termination of leases	1	(153)	(152)	-	-	-	(152)
(Profit)/loss arising on sale of financial assets	-	-	-	-	(3)	(3)	(3)
(Profit)/loss arising on sale of joint ventures and associates	-	(68)	(68)	-	-	-	(68)
Net impairment loss/(reversal) on property, plant and equipment, right of use assets, intangible assets and investment property	(2)	223	221	-	-	-	221
Impairment of joint ventures	-	47	47	-	-	-	47
Adjustment for non-cash element of pensions charge	2	-	2	-	-	-	2
Other defined benefit pension scheme payments	(267)	-	(267)	-	-	-	(267)
Share-based payments	84	-	84	1	-	1	85
Tesco Bank fair value movements included in operating profit/(loss)	-	-	-	100	-	100	100
Cash flows generated from operations excluding working capital	3,751	(118)	3,633	405	(58)	347	3,980
(Increase)/decrease in working capital	24	(77)	(53)	(3,422)	15	(3,407)	(3,460)
Cash generated from/(used in) operations^(a)(c)	3,775	(195)	3,580	(3,017)	(43)	(3,060)	520
Interest paid	(739)	-	(739)	(8)	-	(8)	(747)
Corporation tax paid	(219)	-	(219)	(69)	-	(69)	(288)
Net cash generated from/(used in) operating activities	2,817	(195)	2,622	(3,094)	(43)	(3,137)	(515)
Proceeds from sale of property, plant and equipment, investment property, intangible assets and assets classified as held for sale	3	263	266	-	3,696	3,696	3,962
Purchase of property, plant and equipment and investment property - store buybacks	(136)	(36)	(172)	-	-	-	(172)
Purchase of property, plant and equipment and investment property - other capital expenditure	(690)	-	(690)	(5)	-	(5)	(695)
Purchase of intangible assets	(156)	-	(156)	(39)	-	(39)	(195)
Disposal of subsidiaries, net of cash disposed	4	(10)	(6)	-	-	-	(6)
Acquisition of businesses, net of cash acquired	-	-	-	-	-	-	-
Disposal of associate	-	277	277	-	-	-	277
Net (increase)/decrease in loans to joint ventures and associates	-	-	-	8	-	8	8
Investments in joint ventures and associates	(9)	-	(9)	-	-	-	(9)
Net (investments in)/proceeds from sale of short-term investments	(687)	-	(687)	-	-	-	(687)
Net (investments in)/proceeds from sale of financial assets at fair value through other comprehensive income and amortised cost	(3)	-	(3)	(3)	-	(3)	(6)
Dividends received from joint ventures and associates	12	-	12	16	-	16	28
Dividends received from Tesco Bank	50	-	50	(50)	-	(50)	-
Interest received	16	-	16	-	-	-	16
Net cash generated from/(used in) investing activities	(1,596)	494	(1,102)	(73)	3,696	3,623	2,521
Own shares purchased	(149)	-	(149)	-	-	-	(149)
Repayment of capital element of obligations under leases	(565)	-	(565)	(2)	-	(2)	(567)
Add/(less): Cash inflow from major disposal	-	-	-	-	-	-	-
Less: Net increase/(decrease) in loans to joint ventures and associates	-	-	-	(8)	-	(8)	(8)
Less: Net investments in/(proceeds from sale of) short-term investments	687	-	687	-	-	-	687
Free cash flow^(b)(c)	1,194	299	1,493	(3,177)	3,653	476	1,969
Increase in borrowings	1,022	-	1,022	250	-	250	1,272
Repayment of borrowings	(1,346)	-	(1,346)	(410)	-	(410)	(1,756)
Net cash flows from derivative financial instruments	(17)	-	(17)	-	-	-	(17)
Dividends paid to equity holders	(656)	-	(656)	-	-	-	(656)
Net cash generated from/(used in) financing activities	(1,711)	-	(1,711)	(162)	-	(162)	(1,873)
Net increase/(decrease) in cash and cash equivalents from continuing operations	(490)	299	(191)	(3,329)	3,653	324	133
Net increase/(decrease) in cash and cash equivalents from discontinued operations	395	(22)	373	-	-	-	373
Intra-Group funding and intercompany transactions	3	-	3	(3)	-	(3)	-
Net increase/(decrease) in cash and cash equivalents	(92)	277	185	(3,332)	3,653	321	506
Cash and cash equivalents at the beginning of the year			1,524			1,043	2,567
Effect of foreign exchange rate changes			(42)			-	(42)
Cash and cash equivalents at the end of the year			1,667			1,364	3,031
Cash and overdrafts held in disposal groups			-			-	-
Cash and cash equivalents not held in disposal groups			1,667			1,364	3,031

(a)-(b) Refer to previous table for footnotes.

(c) Refer to page 131 for a reconciliation from Retail operating cash flow, Retail free cash flow and Free cash flow shown above to the Group's 52-week alternative performance measures.

(d) Refer to Note 1 for further details regarding the prior year restatement.

Notes to the Group financial statements

Note 2 Segmental reporting continued

Cash flow statement continued

	Continuingoperations		Discontinuedoperations		TotalGroup
	2021 £m	2020 £m	2021 £m	2020 £m	2021 £m	2020* £m
Operating profit/(loss)	1,736	2,206	5,482	312	7,218	2,518
Depreciation and amortisation	1,747	1,809	20	348	1,767	2,157
(Profit)/loss arising on sale of property, plant and equipment, investment property, intangible assets, assets held for sale and early termination of leases	(195)	(152)	5	(18)	(190)	(170)
(Profit)/loss arising on sale of financial assets	-	(3)	-	-	-	(3)
(Profit)/loss arising on sale of joint ventures and associates	(29)	(68)	-	-	(29)	(68)
(Profit)/loss arising on sales of subsidiaries	-	-	(5,197)	-	(5,197)	-
Transaction and derivative costs associated with sale of subsidiaries	-	-	6	22	6	22
Net impairment loss/(reversal) on property, plant and equipment, right of use assets, intangible assets and investment property	(128)	221	43	81	(85)	302
Impairment of goodwill	295	-	-	-	295	-
Net remeasurement (gain)/loss of non-current assets held for sale	-	-	(5)	-	(5)	-
Impairment of joint ventures	-	47	-	-	-	47
Adjustment for non-cash element of pensions charge	14	2	-	7	14	9
Other defined benefit pension scheme payments	(2,851)	(267)	-	-	(2,851)	(267)
Share-based payments	28	85	2	2	30	87
Tesco Bank fair value movements included in operating profit/(loss)	367	100	-	-	367	100
Cash flows generated from operations excluding working capital	984	3,980	356	754	1,340	4,734
(Increase)/decrease in working capital	287	(3,460)	(41)	(83)	246	(3,543)
Cash generated from/(used in) operations	1,271	520	315	671	1,586	1,191
Interest paid	(686)	(747)	(43)	(56)	(729)	(803)
Corporation tax paid	(170)	(288)	(85)	(52)	(255)	(340)
Net cash generated from/(used in) operating activities	415	(515)	187	563	602	48
Proceeds from sale of property, plant and equipment, investment property, intangible assets and assets classified as held for sale	232	3,962	5	3	237	3,965
Purchase of property, plant and equipment and investment property	(1,052)	(867)	(119)	(136)	(1,171)	(1,003)
Purchase of intangible assets	(202)	(195)	(4)	(6)	(206)	(201)
Disposal of subsidiaries, net of cash disposed	7,806	(6)	(713)	-	7,093	(6)
Acquisition of businesses, net of cash acquired	15	-	-	-	15	-
Disposal of associate	-	277	-	-	-	277
Net (increase)/decrease in loans to joint ventures and associates	(2)	8	-	-	(2)	8
Investments in joint ventures and associates	(11)	(9)	-	-	(11)	(9)
Net (investments in)/proceeds from sale of short-term investments	62	(687)	-	-	62	(687)
Net (investments in)/proceeds from sale of financial assets at fair value through other comprehensive income and amortised cost	116	(6)	-	-	116	(6)
Dividends received from joint ventures and associates	17	28	9	14	26	42
Interest received	10	16	2	2	12	18
Net cash generated from/(used in) investing activities	6,991	2,521	(820)	(123)	6,171	2,398
Own shares purchased	(66)	(149)	-	-	(66)	(149)
Repayments of obligations under leases	(564)	(567)	(57)	(67)	(621)	(634)
Increase in borrowings	1,098	1,272	-	-	1,098	1,272
Repayment of borrowings	(1,814)	(1,756)	-	-	(1,814)	(1,756)
Net cash flows from derivative financial instruments	(580)	(17)	-	-	(580)	(17)
Dividends paid to equity holders	(5,858)	(656)	-	-	(5,858)	(656)
Net cash generated from/(used in) financing activities	(7,784)	(1,873)	(57)	(67)	(7,841)	(1,940)

Net increase/(decrease) in cash and cash equivalents before intra- group funding and intercompany transactions	(378)	133	(690)	373	(1,068)	506

Intra-Group funding and intercompany transactions	(357)	371	357	(371)	-	-

Net increase/(decrease) in cash and cash equivalents	(735)	504	(333)	2	(1,068)	506
Cash and cash equivalents at the beginning of the year					3,031	2,567
Effect of foreign exchange rate changes					8	(42)
Cash and cash equivalents at the end of the year					1,971	3,031
Cash and overdrafts held in disposal groups					7	-
Cash and cash equivalents not held in disposal groups					1,978	3,031

* Refer to Note 1 for further details regarding the prior year restatement.

Notes to the Group financial statements

Note 3 Income and expenses

Auditor's remuneration

	52 weeks 2021 £m	53 weeks 2020 £m
Fees payable to the Company's auditor and its associates for the audit of the Company and Group financial statements	2.3	1.6
The audit of the accounts of the Company's subsidiaries	8.3	5.8
Total audit services	10.6	7.4
Audit-related assurance services	1.1	0.5
Other services:
Transaction services	0.6	0.2
All other non-audit services	0.8	1.6
Total non-audit services	2.5	2.3
Total auditor's remuneration	13.1	9.7

Audit-related assurance services of £1.1m (2020: £0.5m) comprise: review of the Group's interim report £0.5m (2020: £0.5m), audit of the parent company interim accounts drawn up to support the special dividend to shareholders £0.3m (2020: £nil) and other services £0.3m (2020: £nil). Transaction services represents provision of reporting accountant services related to the disposal of the Group's Thailand and Malaysia operations £0.6m (2020: £0.2m). Other non-audit services of £0.8m (2020: £1.6m) represents: provision of data repository services for information needed for disclosure purposes as part of ongoing claims £0.8m (2020: £0.6m), SFO monitor role £nil (2020: £0.6m) and other services £nil (2020: £0.4m). In addition to the amounts shown above, the auditor received fees of £0.3m (2020: £0.1m) for the audit of the main Group pension scheme. Non-audit services are subject to approval by the Chief Audit and Risk Officer and the Audit committee.

Employment costs, including Directors' remuneration

Continuing operations	Notes	52 weeks 2021 £m	53 weeks 2020 £m
Wages and salaries		6,443	5,817
Social security costs		509	464
Post-employment defined benefits ^(a)	29	48	37
Post-employment defined contributions	29	347	329
Share-based payments expense	28	69	122
Termination benefits(b)		33	100
Total		7,449	6,869

(a) Includes £7m (2020: £nil) past service cost related to guaranteed minimum pensions (GMPs). This is treated as an exceptional item. Refer to Note 4 and Note 29.
(b) Includes £nil (2020: £95m) of redundancy costs included within exceptional items. Refer to Note 4.

Post-employment defined contribution charges include £132m (2020: £116m) of salaries paid as pension contributions. The table below shows the average number of employees by operating segment during the financial year.

	Average number of employees		Average number of full-time equivalents
Continuing operations	2021	2020^(a)	2021	2020^(b)
UK & ROI	336,392	319,303	214,470	210,768
Central Europe	27,273	31,558	25,054	28,955
Tesco Bank	3,656	3,587	3,387	3,305
Total	367,321	354,448	242,911	243,028

(a) The average number of employees in the year ended 29 February 2020 excludes the average number of employees of 68,644 in discontinued operations.

(b) The average number of full-time equivalents in the year ended 29 February 2020 excludes the average number of full-time equivalents of 50,935 in discontinued operations.

Notes to the Group financial statements

Note 4 Exceptional items and amortisation of acquired intangibles

Group income statement

52 weeks ended 27 February 2021

Profit/(loss) for the year from continuing operations included the following exceptional items and amortisation of acquired intangibles:

Exceptional items and amortisation of acquired intangibles included in:	Cost of sales £m	Administrative expenses £m	Total exceptional items and amortisation of acquired intangibles included within operating profit £m	Share of joint venture and associates profits/(losses) £m	Finance costs £m	Taxation £m
Exceptional items:
Property transactions^(a)	19	7	26	-	-	18
Booker integration costs^(b)	(21)	(4)	(25)	-	-	4
ATM business rates^(c)	105	-	105	-	-	(20)
Acquisition of property joint venture^(d)	134	-	134	-	-	(23)
Litigation costs^(e)	-	(93)	(93)	-	-	-
GMP equalisation^(f)	(6)	(1)	(7)	-	-	1
Net impairment reversal of non-current assets^(g)	156	-	156	-	-	8
Impairment charge on goodwill^(h)	-	(295)	(295)	-	-	-
Employee Share Scheme⁽ⁱ⁾	(4)	-	(4)	-	-	-
Release of tax provisions^(j)	-	-	-	-	-	106
Total exceptional items	383	(386)	(3)	-	-	94
Amortisation of acquired intangibles:
Amortisation of acquired intangible assets (Note 10)	-	(76)	(76)	-	-	2
Total exceptional items and amortisation of acquired intangibles	383	(462)	(79)	-	-	96

(a) As part of the Group's strategy to maximise value from property, the Group disposed of surplus properties.

(b) Final costs incurred in integrating Booker within the Tesco Group, mainly focused on aligning distribution networks and operating platforms.

(c) Supreme Court ruling in May 2020 that Tesco Group is due a refund of business rates related to external facing ATMs in stores.

(d) The Group obtained control of The Tesco Property (No. 2) Limited Partnership, previously accounted for as a joint venture, through the acquisition of the other partner's 50% interest in the partnership for a net consideration of £29m. The acquisition, which is treated as an asset acquisition, increases the Group's owned property portfolio and borrowings, replacing the Group's associated right of use assets and lease liabilities. Refer to Note 33 for further details.

(e) Costs arising from the 2016 claims against Tesco PLC for matters arising out of or in connection with the overstatement of expected profit announced in 2014.

(f) This relates to a non-cash charge in respect of the Group's defined benefit pension obligations in the UK, arising from equalisation of guaranteed minimum pensions (GMPs) following a further High Court ruling. Refer to Note 29 for further details.

(g) Net impairment reversal relating to the Group's non-current assets. A further £32m net impairment loss of non-current assets is included within the £134m gain on acquisition of property joint venture. Refer to Notes 15 and 33 for further details.

(h) An impairment charge was recognised on the goodwill associated with Tesco Bank (2020: £nil). Refer to Note 15 for further details.

(i) These are costs related to the special dividend and share consolidation with respect to Employee Share Schemes.

(j) The agreement of previously uncertain tax positions arising in prior periods has resulted in a release of tax provisions no longer required.

53 weeks ended 29 February 2020

Profit/(loss) for the year from continuing operations included the following exceptional items and amortisation of acquired intangibles:

Exceptional items and amortisation of acquired intangibles included in:	Cost of sales £m	Administrative expenses £m	Total exceptional items and amortisation of acquired intangibles included within operating profit £m	Share of joint venture and associates profits/(losses) £m	Finance costs £m	Taxation £m
Exceptional items
Net restructuring and redundancy costs	(95)	(13)	(108)	-	-	21
Provision for customer redress	(45)	-	(45)	-	-	-
Derivative restructuring	-	-	-	-	(180)	34
Acquisition of property joint venture	(136)	-	(136)	-	-	(23)
Impairment of investment in India joint venture	-	(47)	(47)	-	-	-
Disposal of China associate	-	37	37	-	-	(30)
China land penalties	-	-	-	(12)	-	-
Tesco Bank mortgage disposal	(8)	3	(5)	-	29	(14)
Closure of Tesco Bank current accounts to new customers	-	(56)	(56)	-	-	14
Ogden rate change	-	-	-	4	-	-
Property transactions	33	-	33	-	-	15
Booker integration costs	(18)	(5)	(23)	-	-	4
Net impairment reversal of non-current assets	60	4	64	-	-	16
Total exceptional items	(209)	(77)	(286)	(8)	(151)	37
Amortisation of acquired intangibles:
Amortisation of acquired intangible assets (Note 10)	-	(79)	(79)	-	-	15
Total exceptional items and amortisation of acquired intangibles*	(209)	(156)	(365)	(8)	(151)	52

* Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

Notes to the Group financial statements

Note 4 Exceptional items and amortisation of acquired intangibles continued

Group cash flow statement

The table below shows the impact of exceptional items on the Group cash flow statement:

Amortisation of acquired intangibles does not affect the Group's cash flow.

	Cash flows from operating activities		Cash flows from investing activities		Cash flows from financing activities
	52 weeks 2021 £m	53 weeks 2020 £m	52 weeks 2021 £m	53 weeks 2020 £m	52 weeks 2021 £m	53 weeks 2020 £m
Prior year restructuring and redundancy costs	(36)	(124)	-	-	-	-
Current year restructuring and redundancy costs	-	(53)	-	-	-	-
Property transactions	-	-	148	263	-	-
Settlement of claims for customer redress in Tesco Bank	(19)	(38)	-	-	-	-
Booker integration cash payments	(2)	(23)	-	-	-	-
Proceeds from sale of Tesco Bank's mortgage book	-	-	51	3,696	-	-
Acquisition of property joint venture (Note 33)	-	-	(52)	(36)	-	-
Proceeds from disposal of China associate	-	-	-	277	-	-
Corporate activity costs	-	-	-	(10)	-	-
Litigation costs	(93)	-	(2)	-	-	-
Disposal of Asia operations(a)	26	-	7,811	-	52	-
Additional pension contribution(b)	(2,500)	-	-	-	-	-
Costs and proceeds deposit associated with the sale of Poland	-	-	(3)	-	-	-
Special dividend(c)	-	-	-	-	(4,916)	-
ATM income(d)	90	-	-	-	-	-
Total continuing operations	(2,534)	(238)	7,953	4,190	(4,864)	-
Exceptional cash flows from discontinued operations	(15)	(25)	-	3	-	-
Disposal of Asia operations(a)	-		(713)		-
Total	(2,549)	(263)	7,240	4,193	(4,864)	-

(a) Other operating cash flows on disposal of the Group's Asia operations of £26m comprise of £30m advance payments received on sale of software licences due to be completed in the next financial year, offset by £(4)m of costs incurred related to the special dividend and share consolidation with respect to employee share schemes. Total disposal proceeds, net of associated disposal costs, cash disposed, and repayment of intercompany loans were £7,098m, of which £7,811m is presented within continuing operations and £(713)m is presented within discontinued operations. The cash inflow from financing activities of £52m is with respect to the derivative fair value gain net of option premiums paid to economically hedge the foreign exchange risk on the USD disposal proceeds. Refer to Note 7 for further details.

(b) Subsequent to the disposal of the Group's Asia operations, the Group made a significant pension contribution of £2.5 bn. Refer to Note 29 for further details.

(d) Amounts received in the year with respect to the Supreme Court ruling related to external facing ATMs in stores.

Note 5 Finance income and costs

Continuing operations	Notes	52 weeks 2021 £m	53 weeks 2020(a) £m
Finance income
Interest receivable and similar income		10	16
Finance income receivable on net investment in leases		5	4
Total finance income		15	20
Finance costs
GBP MTNs and loans		(158)	(142)
EUR MTNs		(51)	(59)
USD bonds		(9)	(11)
Finance charges payable on lease liabilities		(446)	(486)
Other interest payable		(31)	(24)
Fair value remeasurements of financial instruments(b)		(214)	(246)
Total finance costs before exceptional items and net pension finance costs		(909)	(968)
Net pension finance costs	29	(43)	(71)
Total finance costs before exceptional items		(952)	(1,039)
Fair value remeasurement loss on derivative restructuring	4	-	(180)
Fair value remeasurement gain on Tesco Bank mortgage book disposal	4	-	29
Total finance costs		(952)	(1,190)
Net finance costs		(937)	(1,170)

(a) Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

(b) Fair value remeasurements of financial instruments included £(160)m (2020: £(65)m) relating to the premium paid on the repurchase of long-dated bonds.

Notes to the Group financial statements

Note 6 Taxation

Recognised in the Group income statement

Continuing operations	52 weeks 2021 £m	53 weeks 2020(a) £m
Current tax (credit)/charge
UK corporation tax	228	244
Overseas tax	60	75
Adjustments in respect of prior years	(110)	(41)
	178	278
Deferred tax (credit)/charge
Origination and reversal of temporary differences	(67)	29
Adjustments in respect of prior years	(19)	(17)
Change in tax rate	12	-
	(74)	12
Total income tax (credit)/charge	104	290

(a) Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details

The Finance Act 2020 included legislation to maintain the main rate of UK corporation at 19%, rather than reducing it to 17% from 1 April 2020. The change to the main rate of corporation tax was substantively enacted by the balance sheet date and therefore included in these financial statements. Temporary differences have been remeasured using these enacted tax rates that are expected to apply when the liability is settled or the asset realised. The UK Budget announcements on 3 March 2021 included an increase to the UK's main corporation tax rate to 25%, which is due to be effective from 1 April 2023. These changes were not substantively enacted at the balance sheet date and hence have not been reflected in the measurement of deferred tax balances.

Reconciliation of effective tax charge

Continuing operations	52 weeks 2021 £m	53 weeks 2020^(a) £m
Profit/(loss) before tax	825	1,028
Tax credit/(charge) at 19.0% (2020: 19.0%)	(157)	(195)
Effect of:
Non-qualifying depreciation	(33)	(30)
Expenses not deductible^(b)	(40)	(55)
Unrecognised tax losses	-	(4)
Property items taxed on a different basis to accounting entries	4	(3)
Impairment of non-current assets	(22)	(37)
Banking surcharge tax	13	(11)
Differences in overseas taxation rates	10	7
Adjustments in respect of prior years^(c)	129	58
Share of losses of joint ventures and associates	5	(2)
Change in tax rate	(12)	-
Irrecoverable withholding tax	(1)	(18)
Total income tax credit/(charge)	(104)	(290)
Effective tax rate	12.6%	28.2%

(a) Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

(b) Prior year included movements on uncertain tax positions.

(c) Prior year adjustments include tax credits of £(106)m in relation to uncertain tax positions and £(20)m in relation to rolled over gains and capital losses on property disposals classified as exceptional.

Notes to the Group financial statements
Note 6 Taxation continued

Reconciliation of effective tax charge on profit before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments

Continuing operations	52 weeks 2021 £m	53 weeks 2020^(a) £m
Profit/(loss) before tax before exceptional items and amortisation of acquired intangibles	904	1,552
Tax credit/(charge) at 19.0% (2020: 19.0%)	(172)	(295)
Effect of:
Non-qualifying depreciation	(33)	(30)
Expenses not deductible^(b)	(21)	(40)
Unrecognised tax losses	-	(2)
Impairment of non-current assets	1	-
Banking surcharge tax	13	(17)
Differences in overseas taxation rates	10	7
Adjustments in respect of prior years	(1)	53
Share of profits of joint ventures and associates	5	-
Change in tax rate	(1)	-
Irrecoverable withholding tax	(1)	(18)
Total income tax credit/(charge) before exceptional items and amortisation of acquired intangibles	(200)	(342)
Effective tax rate before exceptional items and amortisation of acquired intangibles	22.1%	22.0%
Tax charge on net pension finance costs and fair value remeasurements of financial instruments at 19.0% on £257m (2020: 19.0% on £317m)	(49)	(60)
Change in tax rate	-	2
Total income tax credit/(charge) before exceptional items, net pension finance costs and fair value remeasurements^(c)	(249)	(400)
Effective tax rate before exceptional items, net pension finance costs	21.4%	21.4%

(a) Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

(b) Prior year included movements on uncertain tax positions.

(c) Refer to page 129 for a reconciliation from Effective tax rate before exceptional items, net pension finance costs and fair value remeasurements of financial instruments shown above to the Group's 52-week alternative performance measure.

Tax on items credited directly to the Group statement of changes in equity

Continuing operations	52 weeks 2021 £m	53 weeks 2020 £m
Current tax credit/(charge) on:
Share-based payments	5	1
Deferred tax credit/(charge) on:
Share-based payments	(11)	(3)
Total tax on items credited/(charged) to the Group statement of changes in equity	(6)	(2)

Tax relating to components of the Group statement of comprehensive income/(loss)

Continuing operations	52 weeks 2021 £m	53 weeks 2020 £m
Current tax credit/(charge) on:
Pensions	176	-
Foreign exchange movements	-	1
Deferred tax credit/(charge) on:
Pensions	67	71
Fair value of movement on financial assets at fair value through other comprehensive income	-	(1)
Fair value movements on cash flow hedges	9	(9)
Total tax on items credited/(charged) to Group statement of comprehensive income/(loss)	252	62

Notes to the Group financial statements
Note 6 Taxation continued

Deferred tax

The following are the major deferred tax (liabilities)/assets recognised by the Group and movements thereon during the current and prior financial years measured using the tax rates that are expected to apply when the liability is settled or the asset realised based on the tax rates that have been enacted or substantively enacted by the balance sheet date:

	Property-related items^(b) £m	Acquired intangibles £m	Post-employment benefits^(c) £m	Share-based payments £m	Short-term timing differences £m	Tax losses £m	Financial instruments £m	Total £m
At 23 February 2019 (restated^(a))	(207)	(114)	470	51	121	6	32	359
Discontinued operations	(1)	-	2	-	(2)	-	-	(1)
(Charge)/credit to the Group income statement	38	14	(33)	2	(26)	(2)	(5)	(12)
(Charge)/credit to the Group statement of changes in equity	-	-	-	(3)	-	-	-	(3)
(Charge)/credit to the Group statement of comprehensive income/(loss)	-	-	71	-	-	-	(10)	61
Disposals	1	-	-	-	-	-	-	1
Foreign exchange and other movements^(d)	1	-	2	1	-	-	-	4
At 29 February 2020 (restated^(a))	(168)	(100)	512	51	93	4	17	409
Discontinued operations	14	-	(6)	(6)	(63)	-	-	(61)
(Charge)/credit to the Group income statement	32	2	9	(3)	40	(1)	(5)	74
(Charge)/credit to the Group statement of changes in equity	-	-	-	(11)	-	-	-	(11)
(Charge)/credit to the Group statement of comprehensive income/(loss)	-	-	67	-	-	-	9	76
Acquisitions	(2)	-	-	-	-	-	19	17
Foreign exchange and other movements^(d)	(1)	-	-	-	(1)	-	2	-
At 27 February 2021^(e)	(125)	(98)	582	31	69	3	42	504

(a) Refer to Note 1 for further details regarding the prior year restatement.

(b) Property-related items include a deferred tax liability on rolled-over gains of £305m (2020: £291m), deferred tax assets on capital losses of £187m (2020: £166m) and deferred tax assets on IFRS 16 transitional adjustments of £267m (2020: £252m). The remaining balance relates to accelerated tax depreciation.

(c) The deferred tax asset on retirement benefits includes £364m of deferred tax relief from the additional contribution paid in the year and £218m deferred tax related to the pension deficit see Note 29.

(d) The deferred tax charge for foreign exchange and other movements is a £nil charge (2020: £4m credit) relating to the retranslation of deferred tax balances at the balance sheet date.

(e) Remeasurement of temporary differences for the announced increase to the UK corporation tax rate if enacted is estimated to increase the opening deferred tax asset in the financial year ended 26 February 2022 by £60m.

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to do so. The following is the analysis of the deferred tax balances after offset:

	2021 £m	2020 (restated) £m
Deferred tax assets	552	449
Deferred tax liabilities	(48)	(40)
	504	409

No deferred tax liability is recognised on temporary differences of £4.4bn (2020 restated: £4.5bn) relating to the unremitted earnings of overseas subsidiaries and joint ventures as the Group is able to control the timing of the reversal of these temporary differences and it is probable that they will not reverse in the foreseeable future. The deferred tax on unremitted earnings at 27 February 2021 is estimated to be £5m (2020: £7m) which relates to taxes payable on repatriation and dividend withholding taxes levied by overseas tax jurisdictions. UK tax legislation relating to company distributions provides for exemption from tax for most repatriated profits, subject to certain exceptions.

Unrecognised deferred tax assets

Deferred tax assets in relation to continuing operations have not been recognised in respect of the following items (because it is not probable that future taxable profits will be available against which the Group can utilise the benefits):

Notes to the Group financial statements
Note 6 Taxation continued

As at 27 February 2021, the Group has unused trading tax losses from continuing operations of £623m (2020: £656m) available for offset against future profits. A deferred tax asset has been recognised in respect of £19m (2020: £25m) of such losses. No deferred tax asset has been recognised in respect of the remaining overseas tax losses of £604m (2020: £631m) due to the unpredictability of future profit streams. Included in unrecognised tax losses are losses of £518m that will expire by 2024 (2020: £284m in 2023) and £37m that will expire between 2025 and 2041 (2020: £298m between 2024 and 2040). Other losses will be carried forward indefinitely.

Changes in tax law or its interpretation

The Group operates in a number of territories which leads to the Group's profits being subject to tax in many jurisdictions. The Group monitors income tax developments in these territories (which include the OECD Base Erosion and Profit Shifting (BEPS) initiative and European Union's state aid investigations) which could affect the Group's tax liabilities.

Note 7 Discontinued operations and assets classified as held for sale

Assets and liabilities of the disposal group and non-current assets classified as held for sale

	2021 £m	2020 £m
Assets of the disposal group	404	-
Non-current assets classified as held for sale	201	285
Total assets of the disposal group and non-current assets classified as held for sale	605	285
Liabilities of the disposal group	(276)	-
Total net assets of the disposal group and non-current assets classified as held for sale	329	285

Assets and liabilities of the disposal group are with respect to the Group's operations in Poland.

The assets classified as held for sale consist mainly of properties in the UK and Central Europe due to be sold within one year.

Balance sheet of the disposal group

	Poland £m
Assets of the disposal group
Goodwill and other intangible assets	3
Property, plant and equipment	214
Right of use assets	82
Inventories	58
Trade and other receivables	19
Cash and cash equivalents	28
Total assets of the disposal group	404
Liabilities of the disposal group
Trade and other payables	(90)
Current tax liabilities	(1)
Lease liabilities	(134)
Borrowings	(35)
Provisions	(16)
Total liabilities of the disposal group	(276)
Total net assets of the disposal group	128

Discontinued operations

On 9 March 2020, the Group reached agreement on the terms of a proposed sale of its operations in Thailand and Malaysia, which were presented in the Group's former Asia segment. The transaction received shareholder approval on 14 May 2020, and the disposal completed on 18 December 2020. The results have been presented as discontinued operations.

On 18 June 2020, the Group reached agreement on the terms of a proposed corporate sale of its business in Poland, which was previously presented in the Group's Central Europe segment. The transaction completed after the balance sheet date on 16 March 2021. The assets and liabilities related to the Group's Poland operation have been classified as a disposal group held for sale within the year. Further properties in Poland not included in the corporate sale also individually meet the criteria to be classified as held for sale, and therefore the Group's entire business in Poland has been presented as discontinued operations.

Notes to the Group financial statements

Note 7 Discontinued operations and assets classified as held for sale continued

Income statement of discontinued operations

	2021				2020
	Thailand and Malaysia £m	Poland £m	Other £m	Total £m	Thailand and Malaysia m	Poland £m	Other £m	Total £m
Revenue	3,932	974	-	4,906	5,218	1,451	-	6,669
Operating costs ^(a)	(3,492)	(982)	-	(4,474)	(4,773)	(1,462)	-	(6,235)
Operating profit, before exceptional items	440	(8)	-	432	445	(11)	-	434
Share of post-tax profits/(losses) of joint ventures and associates	9	-	-	9	26	-	-	26
Finance (costs)/income	(26)	(19)	-	(45)	(37)	(14)	-	(51)
Profit/(loss) before tax, before exceptional items	423	(27)	-	396	434	(25)	-	409
Taxation	(84)	(3)	-	(87)	(85)	(6)	-	(91)
Profit/(loss) after tax, before exceptional items	339	(30)	-	309	349	(31)	-	318
Exceptional items ^(b)	(3)	(56)	(88)	(147)	(11)	(111)	-	(122)
Tax on exceptional items ^(c)	-	-	-	-	1	-	38	39
Profit after tax on disposal of Thailand and Malaysia	5,264	-	-	5,264	-	-	-	-
Total profit/(loss) after tax of discontinued operations	5,600	(86)	(88)	5,426	339	(142)	38	235

(a) Operating costs include £(20)m depreciation and amortisation charges (2020: £(348)m).

(b) Exceptional items of £(147)m (2020: £(122)m) includes £(7)m (2020: £(43)m) of net restructuring and redundancy costs, £(43)m (2020: £(79)m) of net impairment loss on non-current assets, £5m fair value remeasurement of non-current assets classified as held for sale (2020: £nil), £(8)m loss (2020: £22m profit) on disposal of surplus properties, £(6)m of other corporate activity costs (2020: £(22)m) and £(88)m (2020: £nil) provision relating to claims from Homeplus (Korea) purchasers.

(c) There was no tax on exceptional items (2020: £39m credit) including £nil with respect to the release of withholding tax liability in relation to the formation of the Group's former Gain Land associate (2020: £38m credit).

The profit after tax on disposal of the Group's Thailand and Malaysia operations comprises the following:

	£m
Gross proceeds^(a)	7,938
Fair value gain on derivative contracts^(b)	295
Proceeds inclusive of fair value gain on derivative contracts	8,233
Costs to sell^(c)	(122)
Proceeds less costs to sell	8,111
Option premiums paid^(b)	(243)
Proceeds less cost to sell and option premiums paid	7,868
Net book value of assets disposed
Goodwill and other intangible assets	(288)
Property, plant and equipment	(2,452)
Right of use assets	(788)
Investment in joint ventures and associates	(149)
Deferred tax	(29)
Inventories	(377)
Trade and other receivables	(104)
Cash and cash equivalents^(d)	(1,122)
Trade and other payables	966
Borrowings^(d)	409
Lease liabilities	765
Current tax	1
Post-employment benefit obligations	34
Provisions	50
Net book value of assets disposed	(3,084)
Currency translation reserve recycled to income statement	413
Gain before tax on disposal of Thailand and Malaysia	5,197
Taxation^(e)	67
Gain after tax on disposal of Thailand and Malaysia	5,264

(a) Gross proceeds of $10,735m translated at the exchange rate at the date of the transaction of 1.35235 USD to £ Sterling.

(b) The fair value gain on derivative contracts of £295m and option premiums paid of £(243)m relate to derivative contracts entered into by the Group to economically hedge the foreign exchange risk on the USD disposal proceeds.

(c) Total costs associated with the sale of the business, share consolidation and special dividend amounted to £139m, of which £10m were expensed in the prior financial year, £122m have been charged within costs to sell, £3m of costs associated with the special dividend and share consolidation have been charged within equity as a cost of the special dividend and £4m relating to employee share schemes have been charged within exceptional operating profit of continuing operations. The £122m costs associated with the transaction incurred in the current financial year includes £8m of associated stamp duty and £55m paid to the minority shareholder of Tesco Malaysia in relation to certain rights attached to the shares, with the balance relating to advisor and associated transaction costs.

(d) Cash and cash equivalents include £(658)m of intercompany loans payable to Thailand and settled prior to completion. Borrowings of £409m are with respect to borrowings incurred by Malaysia with the funds subsequently used to repay intercompany loans due from Malaysia immediately prior to completion. Net intercompany loans repaid at completion £(249)m.

(e) Taxation includes £60m tax credit related to cost of hedging and a £7m tax credit recycled from equity.

Notes to the Group financial statements

Note 7 Discontinued operations and assets classified as held for sale continued

The disposal of the operations in Thailand and Malaysia and use of proceeds has reduced Retail net debt by £525m, consisting of £765m of lease liabilities disposed and total cash flows associated with the disposal of £(240)m. The £(240)m cash flow included gross proceeds of £7,938m, cash and cash equivalents disposed of £(464)m excluding intercompany loans repaid prior to closing, net intercompany loans repaid of £(249)m, additional contribution into the defined benefit pension scheme of £(2,500)m, £(4,916)m special dividends paid to equity holders and other associated cash flows. The £(240)m total cash flows are presented £(2,474)m in operating cash flows, £7,098m in investing cash flows, and £(4,864)m in financing cash flows.

Cash flow statement

	2021			2020
	Thailand and Malaysia £m	Poland £m	Total £m	Thailand and Malaysia £m	Poland £m	Total £m
Net cash flows from operating activities	225	(38)	187	625	(62)	563
Net cash flows from investing activities	(811)	(9)	(820)	(118)	(5)	(123)
Net cash flows from financing activities	(42)	(15)	(57)	(50)	(17)	(67)
Net cash flows from discontinued operations	(628)	(62)	(690)	457	(84)	373

Note 8 Dividends

	2021		2020
	Pence/share	£m	Pence/share	£m
Amounts recognised as distributions to owners in the financial year:
Paid prior financial year final dividend(a)	6.50	634	4.10	399
Paid interim dividend(b)	3.20	310	2.65	257
Paid special dividend(c)	50.93	4,948	-	-
Dividends paid to equity owners in the financial year	60.63	5,892	6.75	656

Proposed final dividend at financial year end	5.95	460	6.50	637

(a) Excludes £3m prior financial year final dividend waived (2020: £3m).

(b) Excludes £3m interim dividend waived (2020: £3m).

The proposed final dividend was approved by the Board of Directors on 13 April 2021 and is subject to the approval of shareholders at the AGM. The proposed dividend has not been included as a liability as at 27 February 2021, in accordance with IAS 10 'Events after the reporting period'. It will be paid on 2 July 2021 to shareholders who are on the Register of members at close of business on 21 May 2021.

A dividend reinvestment plan (DRIP) is available to shareholders who would prefer to invest their dividends in the shares of the Company. For those shareholders electing to receive the DRIP, the last date for receipt of a new election is 11 June 2021.

The Group has a share forfeiture programme following the completion of a tracing and notification exercise to any shareholders who have not had contact with Tesco PLC (the Company) over the past 12 years, in accordance with the provisions set out in the Company's Articles of Association. £nil (2020: £nil) of unclaimed dividends in relation to these shares have been adjusted for in retained earnings. Refer to Note 30 for further details.

Note 9 Earnings/(losses) per share and diluted earnings/(losses) per share

Basic earnings/(losses) per share amounts are calculated by dividing the profit/(loss) attributable to owners of the parent by the weighted average number of Ordinary shares in issue during the financial year.

Diluted earnings/(losses) per share amounts are calculated by dividing the profit/(loss) attributable to owners of the parent by the weighted average number of Ordinary shares in issue during the financial year adjusted for the effects of potentially dilutive options. The dilutive effect is calculated on the full exercise of all potentially dilutive Ordinary share options granted by the Group, including performance-based options which the Group considers to have been earned.

For the 52 weeks ended 27 February 2021 there were 27 million (2020: 67 million) potentially dilutive share options. As the Group has recognised a profit for the year from its continuing operations, dilutive effects have been considered in calculating diluted earnings per share.

	2021			2020 ^(a)
	Basic	Potentially dilutive share options	Diluted	Basic	Potentially dilutive share options	Diluted
Profit/(loss) (£m)
Continuing operations	728	-	728	738	-	738
Discontinued operations	5,415	-	5,415	233	-	233
Total	6,143	-	6,143	971	-	971
Weighted average number of shares (millions)	9,629	27	9,656	9,716	67	9,783
Earnings/(losses) per share (pence)
Continuing operations	7.56	(0.02)	7.54	7.60	(0.06)	7.54
Discontinued operations	56.24	(0.16)	56.08	2.39	-	2.39
Total	63.80	(0.18)	63.62	9.99	(0.06)	9.93

(a) Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

Notes to the Group financial statements

Note 9 Earnings/(losses) per share and diluted earnings/(losses) per share continued

Diluted earnings/(losses) per share from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments

	Notes	52 weeks 2021	53 weeks 2020^(a)
Profit before tax from continuing operations before exceptional items and amortisation of acquired intangibles (£m)		904	1,552
Add: Net pension finance costs (£m)	5	43	71
Add: Fair value remeasurements of financial instruments (£m)	5	214	246
Profit before tax from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments (£m) ^(b)		1,161	1,869
Profit before tax from continuing operations before exceptional items and amortisation of acquired		1,168	1,869
intangibles, net pension finance costs and fair value remeasurements of financial instruments attributable to the owners of the parent (£m) ^(c)		1,168	1,869
Taxation on profit from continuing operations before exceptional items and amortisation of acquired		(249)	(400)
intangibles, net pension finance costs and fair value remeasurements of financial instruments attributable to the owners of the parent (£m) ^(d)		(249)	(400)
Profitaftertaxfromcontinuingoperationsbeforeexceptionalitemsandamortisationofacquired intangibles, net pension finance costs and fair value remeasurements of financial instruments attributable to the owners of the parent (£m)		919	1,469

Basic weighted average number of shares (millions)		9,629	9,716
Basicearningspersharefromcontinuingoperationsbeforeexceptionalitemsandamortisationof acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments (pence)		9.54	15.12

Diluted weighted average number of shares (millions)		9,656	9,783
Dilutedearningspersharefromcontinuingoperationsbeforeexceptionalitemsandamortisationof acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments (pence)(b)(e)		9.52	15.02

(a) Comparatives have been restated to present Thailand, Malaysia and Poland as discontinued operations. Refer to Note 7 for further details.

(b) Refer to page 129 for a reconciliation of prior year Profit before tax from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments and Diluted earnings per share from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments shown above to the Group's 52-week alternative performance measures.

(d) Excludes tax charges on losses attributable to non-controlling interests of £nil (2020: £nil).

(e) Refer to page 130 for a reconciliation of the Group's APM Diluted earnings per share from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements (adjusted for share consolidation).

Note 10 Goodwill and other intangible assets

	Goodwill £m	Software(a) £m	Customer relationships £m	Other intangible assets £m	Total £m
Cost
At 29 February 2020 (restated^(b))	5,477	1,868	715	458	8,518
Foreign currency translation	3	-	-	(1)	2
Additions	-	200	-	1	201
Acquired through business combinations(c)	1	-	3	1	5
Reclassification	-	49	-	(49)	-
Transfer to disposal group classified as held for sale	(762)	(86)	-	-	(848)
Disposals	-	(194)	-	(15)	(209)
At 27 February 2021	4,719	1,837	718	395	7,669
Accumulated amortisation and impairment losses
At 29 February 2020	637	1,324	148	331	2,440
Foreign currency translation	5	(3)	-	2	4
Charge for the year^(d)	-	198	76	5	279
Impairment losses^(e)	295	24	-	10	329
Reversal of impairment losses^(e)	-	(9)	-	(7)	(16)
Reclassification	-	35	-	(35)	-
Transfer to disposal group classified as held for sale	(489)	(70)	-	-	(559)
Disposals	-	(194)	-	(7)	(201)
At 27 February 2021	448	1,305	224	299	2,276

Net carrying value
At 27 February 2021	4,271	532	494	96	5,393
At 29 February 2020 (restated^(b))	4,840	544	567	127	6,078

(a) Software includes £305m (2020: £341m) of internally generated development costs.

(b) Refer to Note 1 for further details regarding the prior year restatement.

(d) Of the £81m (2020: £86m) amortisation of customer relationships and other intangible assets, £76m (2020: £79m) has been included within exceptional items and amortisation of intangible assets. £75m (2020: £76m) of this balance arises from amortisation of intangible assets recognised upon the Booker acquisition, and £1m relates to the amortisation of intangible assets recognised upon the acquisition of Best Food Logistics. Refer to Notes 4 and 33 for further details.

(e) Refer to Note 15.

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Thursday, 21st November 2024

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