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Tesco plc Period End 27 February 2010
Explanation for balance sheet restatements not compelling
UK retailer Tesco attributes derecognition of prior year £588 million financial assets and liabilities to a change in policy arising from “emerging industry practice” but we consider it involves an accounting error.
Tesco restates its prior year balance sheet to reduce both assets and liabilities by £588 million, affecting relevant balance sheet line items by 28% and 14% respectively. It discloses that this arises from a change in policy for a sale and repurchase agreement whereby Treasury Bills and related Medium Term Notes (MTNs) are derecognised in order to align with “emerging industry practice”. The MTNs were issued through an internal securitisation and purchased in their entirety by its bank subsidiary to enable it to participate in the Special Liquidity Scheme set by the Bank of England. However, it adds that the Treasury Bills do not meet the recognition criteria under IAS 39 “Financial instruments: recognition and measurement”. The company tells us that a consensus view by accounting professionals has emerged since last year when such internal securitisations were new in concept and it was satisfied with its treatment. It adds that Treasury Bills are considered not to meet the recognition criteria under IAS 39 as the risks and rewards of ownership had not transferred although legal ownership had been transferred.
However, we consider this explanation less than compelling. The Bank of England states that the Special Liquidity Scheme allows “banks to swap temporarily high quality mortgage-backed and other securities for UK Treasury Bills”. It does not, therefore, involve any sale and repurchase agreement as no consideration passes between the parties. In our view, the prior period failure to accurately evaluate the transactions against the recognition criteria under IAS 39 was an error and the description of the restatements as arising from a change in policy for a sale and repurchase agreement to align with “emerging industry practice” is inappropriate. The company tells us that it considers the restatements as voluntary and the amounts involved as not material in relation to its balance sheet and having no impact on profit or net assets.