The new IFRS 16 accounting standards would have boosted Tesco's full-year group operating profit by £401 million, had they been implemented to its 2018/19 results, the retailer said in a statement.
The IFRS 16 standard introduces a new accounting model for leases, and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.
Tesco will be first implementing the IFRS 16 model to its 2019/20 interim results, due in October, however the retailer has adopted the standard retrospectively to its full year figures from last year, which were published at the start of April.
Operating Profit
According to Tesco, while IFRS 16 would have had no impact on Tesco's group sales and cash flow for the full year, group operating profit would have risen to £2.6 billion as rent is removed and only part replaced by depreciation.
In addition, group operating margin would have increased by 63 basis points to 4.08%, including an increase of 64 basis points to 3.62% in the UK and Ireland.
Operating margin would have risen by 56 basis points to 3.51% in Central Europe, by 68 basis points to 6.55% in Asia and by 19 basis points to 18.14% in Tesco Bank.
Profit before tax would have dropped by £152 million, due to the depreciation and interest being higher than the rent they replace, a result of the 'relative immaturity' of Tesco's lease portfolio.
One-Off Credits
'Whilst the impact of IFRS 16 would normally be expected to be broadly equal between the first and second half of any given year, the weighting can be affected by one-off items such as foreign exchange movements and gains on termination of leases,' Tesco said in a statement. 'In the 2018/19 year, a number of one-off credits of this nature were recognised in the second half.'
Net assets reduced by £1.3 billion to £13.5 billion, due to the recognition and derecognition of certain lease obligations and other working capital balances.
Analyst Comment
Commenting on the news, Bruno Monteyne of Bernstein Research said, "All retailers claim that IFRS16 does not change cash generation. Whilst that is correct, it ignores the fact that many investors focus on FCF. In an ideal world, that measure should not change either but different companies have taken different approaches to finance leases (or had different amounts of finance leases).
"Finance leases payments at some retailers were excluded from FCF (in our view wrongly as it is just another form of capex). In some cases we adjusted for that (e.g. B4B) but not always. TSC's FCF comes down by a tiny £17 million under IFRS16 whilst AD comes down by -£177 million."
© 2019 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine
