Tesco PLC’s (LON:TSCO) debts would be higher and earnings per share lower last year under the new accounting rules that are being introduced in 2019, the grocery giant has revealed.
Republishing its last set of financial results showed that IFRS 16 standards will have no effect on sales and cash flow but the new treatment of many of its near-7,000 stores will affect profits, earnings, assets and liabilities. The new rules force companies to reflect up-front the net present value of the assets and liabilities generated by leases lasting longer than 12 months.
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While Tesco will not report its first set of results under IFRS 16 until October’s half-year results for the 2019/20 financial year, the FTSE 100 group on Monday provided the recalculation of its recent full-year numbers to help investors and analysts get a better idea of what to expect.
For the 52 weeks ended 23 February 2019, operating profit would have increased £401mln to £2.61bn as rent is removed and only part-replaced by depreciation, though profit before tax and diluted earnings per share would both have decreased, by £152mln and 1.39p respectively, due to the combination of depreciation and interest being higher than the rent they replace.
Tesco said this was due to the “relative immaturity” of its lease portfolio, with leases being around one-third expired on average. “The proportion of EPS dilution will reduce as the portfolio matures and, most notably, as underlying earnings increase.”
The new accounting rules would have increased total indebtedness by £3.3bn to £15.5bn due to lease extensions and contingent commitments being included and lease-specific discount rates being applied, with net assets cut by £1.3bn to £13.5bn due to recalculations of leases and recognition of assets.
Tesco shares were down 0.5% to 248.7p in late-afternoon trading on Monday.
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