IMPORTANT NOTICE

THE OFFERING OF NOTES DESCRIBED IN THE ATTACHED PROSPECTUS IS AVAILABLE ONLY TO INVESTORS WHO ARE EITHER (1) QUALIFIED INSTITUTIONAL BUYERS ("QIBS") IN RELIANCE ON THE EXEMPTION FROM REGISTRATION REQUIREMENTS OF THE US SECURITIES ACT OF 1933 (THE "SECURITIES ACT") PROVIDED BY RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") OR (2) LOCATED OUTSIDE OF THE UNITED STATES IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT ("REGULATION S").

IMPORTANT: You must read the following before continuing. The following applies to the attached prospectus following this disclaimer, and you are therefore advised to read this carefully before reading, accessing or making any other use of the attached prospectus. In accessing the attached prospectus, you agree to be bound by the following terms and conditions, including any modifications to them any time you receive any information from us as a result of such access.

NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE SECURITIES ACT, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND THE SECURITIES MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, WITHIN THE UNITED STATES EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS.

THE FOLLOWING ATTACHED PROSPECTUS MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THE ATTACHED PROSPECTUS IN WHOLE OR IN PART IS UNAUTHORIZED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS. IF YOU HAVE GAINED ACCESS TO THIS TRANSMISSION CONTRARY TO ANY OF THE FOREGOING RESTRICTIONS, YOU ARE NOT AUTHORIZED AND WILL NOT BE ABLE TO PURCHASE ANY SECURITIES.

Confirmation of your representation: In order to be eligible to view the attached prospectus or make an investment decision with respect to the notes, prospective investors must be either (1) QIBs (within the meaning of Rule 144A) or (2) located outside the United States in accordance with Regulation S under the Securities Act. The attached prospectus is being sent at your request and by accepting the e-mail and accessing the attached prospectus, you shall be deemed to have represented to the Issuer and the Initial Purchasers (as defined below) that (1) either (a) you and any customers you represent are QIBs or (b) you and any customers you represent are located outside the United States and the electronic mail address that you have provided and to which this e-mail has been delivered is not located in the United States, its territories and possessions, any state of the United States or the District of Columbia and (2) you consent to delivery of the attached prospectus and the Prospectus by electronic transmission.

You are reminded that the attached prospectus has been delivered to you on the basis that you are a person into whose possession it may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorized to, deliver the attached prospectus to any other person.

The materials relating to this offering do not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that the offering be made by a licensed broker or dealer and the underwriter or any affiliate of the underwriter is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by the underwriter or such affiliate on behalf of the Issuer in such jurisdiction.

The attached prospectus is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (iii) high net worth entities falling within Article 49(2)(a) to (d) of the Order, and other persons to whom it may lawfully be communicated (all such persons together being referred to as "relevant persons"). The notes are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such notes will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on the attached prospectus or any of its contents.

The attached prospectus has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently none of Barclays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, HSBC Securities (USA) Inc., ING Financial Markets LLC, Lloyds Securities Inc., Mitsubishi UFJ Securities (USA), Inc., RBS Securities Inc., Santander Investment Securities Inc. or Standard Chartered Bank or any person who controls them, nor any director, officer, employee or agent of any of them or affiliate of any such person accepts any liability or responsibility whatsoever in respect of any difference between the attached prospectus distributed to you in electronic format and the hard copy version available to you on request from the initial purchasers named in the attached prospectus.

$1,000,000,000

Tesco PLC

$500,000,000 2.000% Senior Notes due 2014 $500,000,000 2.700% Senior Notes due 2017 ________________

Tesco PLC (the "Issuer") is issuing senior notes due 2014 (the "2014 notes") that will bear interest at a rate of 2.000% per year and senior notes due 2017 (the "2017 notes", and together with the 2014 notes, the "notes") that will bear interest at a rate of 2.700% per year. Interest on the 2014 notes is payable on June 5 and December 5 of each year, beginning on June 5, 2012. Interest on the 2017 notes is payable on January 5 and July 5 of each year, beginning on July 5, 2012. The 2014 notes and the 2017 notes will mature on December 5, 2014 and January 5, 2017, respectively. The Issuer may redeem the notes in whole or in part at any time at the applicable make-whole redemption price or at par plus accrued and unpaid interest in the event of certain tax changes. In certain change of control events, the Issuer will be required to offer to repurchase the notes at 101% the aggregate principal amount. See "Description of the Notes—Redemption".

The notes will be our senior unsecured obligations and will rank equally with all of our other unsecured senior indebtedness.

Application has been made to the Financial Services Authority in its capacity as competent authority under the Financial Services and Markets Act 2000 ("FSMA") (in such capacity, the "UK Listing Authority") for the notes to be admitted to the official list of the UK Listing Authority (the "Official List") and to the London Stock Exchange plc (the "London Stock Exchange") for the notes to be admitted to trading on the London Stock Exchange's Regulated Market (the "Regulated Market"). Reference in this document to the notes being "listed" (and all related references) shall mean that the notes have been admitted to the Official List and admitted to trading on the Regulated Market. The Regulated Market is a regulated market for the purpose of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments. ________________

Investing in the notes involves risks. See "Risk Factors" beginning on page 16.

It is expected that the notes will be rated A3 by Moody's Investors Service, Inc. ("Moody's"), A- by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") and A- by Fitch Ratings Ltd. ("Fitch"), subject to confirmation at closing. A security rating is not a recommendation to buy, sell or hold the notes and may be subject to revision, suspension or withdrawal at any time by the assigning rating organization. There is no assurance that a rating will remain for any given period of time or that a rating will not be lowered or withdrawn by the relevant rating agency if, in its judgment, circumstances in the future so warrant. In the event that a rating initially assigned to the notes is subsequently lowered for any reason, no person or entity is obliged to provide any additional support or credit enhancement with respect to the notes and the market value of the notes is likely to be adversely affected. In general, European regulated investors are restricted from using a rating for regulatory purposes if such rating is not issued by a credit rating agency established in the European Union and registered under the Regulation (EC) no 1060/2009 of the European Parliament and of the Council of September 16, 2009 on Credit Rating Agencies (the "CRA Regulation") unless the rating is provided by a credit rating agency operating in the European Union before June 7, 2010 which has submitted an application for registration in accordance with the CRA Regulation and such registration is not refused. Fitch was established and has been operating in the European Community prior June 7, 2010 and, as of the date of this document, is registered as credit rating agencies in accordance with the CRA Regulation. Moody's and Standard & Poor's are not established in the European Community and has not applied for registration under the CRA Regulation.

The notes have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws. Accordingly, the notes are being offered and sold only to qualified institutional buyers in accordance with Rule 144A under the Securities Act ("Rule 144A") and outside the United States in accordance with Regulation S under the Securities Act ("Regulation S"). Prospective purchasers that are qualified institutional buyers are hereby notified that the seller of the notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. For a description of certain restrictions on transfers of the notes, see "Plan of Distribution" and "Notice to Investors". ________________

Price of the 2.000% Senior Notes due 2014: 99.896% plus accrued interest, if any, from December 5, 2011 Price of the 2.700% Senior Notes due 2017: 99.890% plus accrued interest, if any, from December 5, 2011

The initial purchasers expect to deliver the notes to purchasers in book-entry form through The Depository Trust Company ("DTC") and through the Euroclear System and Clearstream, Luxembourg (as participants in DTC) on or about December 5, 2011.

	Joint Book-Running Managers
Barclays Capital	BofA Merrill Lynch	Citigroup	Deutsche Bank Securities
Co-Managers
HSBC	ING	Lloyds Securities	Mitsubishi UFJ Securities
RBS	Santander		Standard Chartered Bank

The date of this prospectus is November 30, 2011

You should rely only on the information contained in this document. We have not, and the initial purchasers named in this document (the "Initial Purchasers") have not, authorized anyone to provide you with different information, and you should not rely on any such information. We are not, and the Initial Purchasers are not, making an offer of these securities in any jurisdiction where this offer is not permitted. You should not assume that the information contained in this document is accurate as of any date other than the date on the front of this document.

This document comprises a prospectus for the purposes of Directive 2003/71/EC (the "Prospectus Directive") and for the purpose of giving information with regard to the Issuer, the Group and the notes, which, according to the particular nature of the Issuer, the Group and the notes, is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the Issuer, the Group, and the rights attaching to the notes. The Issuer accepts responsibility for the information contained in this document. To the best of the knowledge of the Issuer, which has taken all reasonable care to ensure that such is the case, the information contained in the document is in accordance with the facts and does not omit anything likely to affect the import of such information.

This document has been prepared by us solely for use in connection with the proposed offering of the securities described in this document (the "Offering"). This document is personal to each offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire securities.

Distribution of this document to any other person other than the prospective investor and any person retained to advise such prospective investor with respect to its purchase is unauthorized, and any disclosure of any of its contents, without our prior written consent, is prohibited.

The Initial Purchasers make no representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this document. Nothing contained in this document is, or shall be relied upon as, a promise or representation by the Initial Purchasers as to the past or future. We have furnished the information contained in this document. The Initial Purchasers assume no responsibility for the accuracy or completeness of any of the information contained herein.

Neither the Securities and Exchange Commission (the "SEC") nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this document. Any representation to the contrary is a criminal offense.

In connection with the issue of the notes, Deutsche Bank Securities Inc. (the "stabilizing manager") (or persons acting on behalf of the stabilizing manager) may over-allot notes or effect transactions with a view to supporting the market price of the notes at a level higher than that which might otherwise prevail. However, there is no assurance that the stabilizing manager (or persons acting on behalf of the stabilizing manager) will undertake stabilization action. Any stabilization action may begin on or after the date on which adequate public disclosure of the terms of the offer of the notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the notes and 60 days after the date of the allotment of the notes. Any stabilization action or over-allotment must be conducted by the stabilizing manager (or person(s) acting on behalf of the stabilizing manager) in accordance with all applicable laws and rules.

The notes are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Securities Act and the applicable state securities laws pursuant to registration or an exemption therefrom. As a prospective purchaser, you should be aware that you may be required to bear the financial risks of this investment for an indefinite period of time. Please refer to the sections in this document entitled "Plan of Distribution" and "Notice to Investors". In making an investment decision, prospective investors must rely on their own examination of the Issuer and the terms of the offering, including the merits and risks involved. Prospective investors should not construe anything in this document as legal, business or tax advice. Each prospective investor should consult its own advisors as needed to make its investment decision

and to determine whether it is legally permitted to purchase the securities under applicable legal investment or similar laws or regulations.

In this document, we rely on and refer to information and statistics regarding our industry. We obtained this market data from independent industry publications or other publicly available information. Although we believe that these sources are reliable, we have not independently verified and do not guarantee the accuracy and completeness of this information. Where information has been sourced from a third party, we confirm that this information has been accurately reproduced and that, as far as we are aware and are able to ascertain from information published by that third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. Where third party information has been included, its source has been stated.

This document contains summaries believed to be accurate with respect to certain documents, but reference is made to the actual documents for complete information. Copies of certain documents referred to herein will be made available to prospective investors upon request to us or the Initial Purchasers.

NOTICE TO NEW HAMPSHIRE RESIDENTS

________________

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

NOTICE TO UK INVESTORS

________________

In the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at (i) persons who are "qualified investors" (as defined in the Prospectus Directive) who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "Order") and/or who are high net worth entities falling within Article 49(2)(a) to (d) of the Order or (ii) persons to whom it may otherwise be lawfully communicated (all such persons together being referred to as "relevant persons"). This document must not be acted on or relied on in the United Kingdom by persons who are not relevant persons. In the United Kingdom, any investment or investment activity to which this document relates is only available to, and will be engaged in with, relevant persons.

WEBSITE INFORMATION

________________

No information posted on any website, including the Issuer's website or websites connected with the Issuer's website, constitutes a part of this document.

PRESENTATION OF FINANCIAL AND OTHER DATA	1
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS	4
CURRENCY PRESENTATION	6
EXCHANGE RATE VARIATION	7
OVERVIEW OF THE GROUP	8
OVERVIEW OF THE OFFERING	11
RISK FACTORS	16
USE OF PROCEEDS	25
CAPITALIZATION	26
SELECTED FINANCIAL INFORMATION	28
OPERATING AND FINANCIAL REVIEW	42
BUSINESS	80
MANAGEMENT	101
PRINCIPAL SHAREHOLDERS	106
DESCRIPTION OF THE NOTES	107
BOOK-ENTRY; DELIVERY AND FORM	122
TAX CONSIDERATIONS	127
PLAN OF DISTRIBUTION	131
NOTICE TO INVESTORS	134
SERVICE OF PROCESS AND ENFORCEABILITY OF CIVIL LIABILITIES	137
INDEPENDENT AUDITORS	138
LEGAL MATTERS	139
ADDITIONAL INFORMATION	140
LISTING AND GENERAL INFORMATION	141
FINANCIAL STATEMENTS	F-1

PRESENTATION OF FINANCIAL AND OTHER DATA

Financial Data

Unless otherwise indicated, financial information included in this document has been prepared in accordance with International Financial Reporting Standards ("IFRS") and IFRS Interpretations Committee ("IFRIC") interpretations as endorsed by the EU, and those parts of the Companies Act 2006 applicable to companies reporting under IFRS ("EU IFRS"). EU IFRS differs in significant respects from generally accepted accounting principles in the United States of America ("US GAAP").

This document includes the financial statements (the "Group Financial Statements") of Tesco PLC, entities over which it has control ("subsidiaries") and its share of its interest in joint ventures and associates (together, the "Group"). The Group Financial Statements comprise the following:

the audited consolidated annual financial statements of the Group (i) as of and for the 52 weeks ended February 26, 2011, the audit report thereon and the notes thereto (the "2011 Audited Consolidated Annual Financial Statements"), (ii) as of and for the 52 weeks ended February 27, 2010, the audit report thereon and the notes thereto (the "2010 Audited Consolidated Annual Financial Statements") and (iii) as of and for the 53 weeks ended February 28, 2009, the audit report thereon and the notes thereto (the "2009 Audited Consolidated Annual Financial Statements", and together with the 2010 Audited Consolidated Annual Financial Statements and the 2011 Audited Consolidated Annual Financial Statements, the "Audited Consolidated Annual Financial Statements"); and
the unaudited consolidated interim financial statements of the Group (i) as of and for the 26 weeks ended August 27, 2011, the review report thereon and the notes thereto (ii) as of and for the 26 weeks ended August 28, 2010, the review report thereon and the notes thereto (the "Unaudited Consolidated Interim Financial Statements").

The selected consolidated financial information as of and for the 52 weeks ended February 26, 2011, the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009 has been derived without material adjustment from our Audited Consolidated Annual Financial Statements beginning on page F-43 of this document. The selected historical financial information as of August 27, 2011 and for the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010 has been derived without material adjustment from our Unaudited Consolidated Interim Financial Statements beginning on page F-2 of this document.

Auditors' Reports

See "Independent Auditors" for a description of the independent auditors' reports, including language limiting the auditors' scope of duty in relation to such reports and the consolidated financial statements to which they relate. In particular, the May 6, 2011 and May 5, 2010 reports of PricewaterhouseCoopers LLP, with respect to the Audited Consolidated Annual Financial Statements, in accordance with guidance issued by The Institute of Chartered Accountants in England and Wales, provides: "This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing". The SEC would not permit such limiting language to be included in a registration statement or a prospectus used in connection with an offering of securities registered under the Securities Act, or in a report filed under the US Securities Exchange Act of 1934, as amended (the "Exchange Act"). If a US court (or any other court) were to give effect to the language quoted above, the

recourse that investors in the notes may have against the independent auditors based on their reports or the consolidated financial statements to which they relate could be limited or precluded altogether.

Reclassification of Certain Financial Information

In this "Operating and Financial Review", unless otherwise indicated, balance sheet, income statement and cash flow information as of and for the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010 have been derived from the Unaudited Consolidated Interim Financial Statements and therefore presented on the reclassified basis described in the paragraphs that follow.

In the 26 weeks ended August 27, 2011, we approved a plan to dispose of our operations in Japan, which are expected to be sold by August 27, 2012. In accordance with IFRS 5 "Non-Current Assets Held for Sale and Discontinued Operations", these operations were classified as a disposal group, which resulted in the following presentation and reclassification in our Unaudited Consolidated Interim Financial Statements:

The net results of these operations were presented separately in the income statement for the 26 weeks ended August 27, 2011 and, for comparative purposes, the income statement for the 26 weeks ended August 28, 2010; and
The assets and liabilities of the disposal group were presented separately under "Assets of the disposal group" in our balance sheet as of August 27, 2011. These assets were included in "Non-current assets classified as held for sale" in our balance sheet as of August 28, 2010.

The net results of Japan for the 52 weeks ended February 26, 2011, the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009 have not been presented as discontinued operations.

For further details, see note 4 to the Unaudited Consolidated Interim Financial Statements.

In addition, in the 26 weeks ended August 27, 2011, we identified certain assets held by Tesco Personal Finance PLC ("Tesco Bank") that had a maturity profile of less than three months that would be more appropriately classified as cash and cash equivalents in accordance with IAS 7 "Statement of Cash Flows". The assets identified comprised loans and advances to banks, certificates of deposit and other receivables. This resulted in the following presentation and reclassification in our Unaudited Consolidated Interim Financial Statements:

Amounts relating to these balances under "Other investments", "Trade and other receivables" and "Cash and cash equivalents" were reclassified in the balance sheet as of August 27, 2011 and, for comparative purposes, the balance sheets as of February 26, 2011 and August 28, 2010.
Amounts relating to these balances (under "Cash generated from operations", as well as, "Investments in short-term and other investments" and "Proceeds from sale of short-term and other investments" (which are included in "Net cash used in investing activities") were reclassified in the cash flow statement for the 26 weeks ended August 27, 2011 and, for comparative purposes, the cash flow statement for the 26 weeks ended August 28, 2010.

There is no net impact on net assets as a whole as originally published as this is a reclassification between two classes of assets. As the reclassification relates only to Tesco Bank, there is no impact on the net debt of our other business segments.

For further details, see note 1 to the Unaudited Consolidated Interim Financial Statements.

the Audited Consolidated Annual Financial Statements and have not been reclassified or adjusted to reflect the classification of Japan as a disposal group or the reclassification of certain Tesco Bank assets that had a maturity profile of less than three months.

Rounding

Some financial information in this document has been rounded, and as a result the numbers shown as totals may vary slightly from the exact arithmetical aggregation of the relevant figures. Our fiscal year ends on the last Saturday in February.

Non-IFRS Measures

In this document, we present certain financial measures, including underlying profit before tax, trading profit, revenues plus value added tax ("VAT"), which we refer to as "sales", and net debt, which are not recognized by IFRS. These measures are presented because we believe that they and similar measures are widely used in our industry as a means of evaluating operating performance. These measures may not be comparable to similarly titled measures used by other companies and are not measurements under IFRS or any other body of generally accepted accounting principles, and thus should not be considered substitutes for the information contained in our audited financial statements.

Industry Data

We have obtained the market data and information related to markets, market size, market share, growth rates and other industry data pertaining to our business and markets used in this document under the captions "Risk Factors", "Industry Overview", and "Business", from internal surveys, industry sources, estimates based on management's knowledge of our sales and markets and our own and third-party research. This research includes private and publicly available surveys or studies. Where information has been sourced from a third party, it has been accurately reproduced and so far as we are aware and are able to ascertain from information published by the third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. Where third-party information has been included, its source has been stated.

Trademark

The Tesco trademark appearing on the front cover of this document and variations thereon are registered trademarks of Tesco and are registered with, or subject to pending trademark applications with, the relevant registries of the United Kingdom and various other countries.

Third-Party Data

The third-party studies and surveys from which information contained in this document has been extracted, as well as our internal estimates, rely on the application of various assumptions. While we believe that these assumptions are reasonable, we cannot assure you that these assumptions are true, nor can we guarantee that an independent party applying different assumptions or using different methods to assemble, analyze or compute market or other industry data would obtain or generate the same results. Where information has been sourced from a third party, we confirm that this information has been accurately reproduced and that as far as we are aware and are able to ascertain from information published by that third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. Where third party information has been included, its source has been stated.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in the forward-looking statements made in this document. Any statements about our expectations, beliefs, plans, strategies, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as "will likely result", "are expected to", "will continue", "believe", "anticipated", "estimated", "intends", "expects", "plans", "seek", "projection" and "outlook". These statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. Among the key factors that have had and we expect to continue to have a direct bearing on our results of operations are:

Our ability to successfully execute our business strategies;
Risks related to our business, excluding Tesco Bank, including the following:
- our financial strategy and Group treasury risk;
- liabilities arising from our pension plans;
- competition and consolidation within our industry, both in the United Kingdom and internationally;
- potential damage to our reputation from, among other things, product safety issues, environmental issues or ethical breaches by third parties we rely on such as suppliers and joint venture partners;
- operational threats and performance in the business;
- our property assets;
- our information technology ("IT") systems and infrastructure, particularly those used in our retailer and retail services;
- our ability to attract, retain, develop and motivate qualified employees at all levels of our operations;
- product safety;
- health and safety;
- fraud, compliance and internal controls;
- regulatory, economic and political risks, including economic downturns that might affect costs of consumer goods and levels of consumer spending;
- activism and terrorism;
- climate change, including rising energy costs, energy-related environmental issues and regulatory requirements;
Risks related to Tesco Bank, including the following:
- funding and liquidity;
external environment;
insurance risk;
regulatory environment;
operational risk;
our transformation program;

These and other factors are discussed in "Risk Factors" beginning on page 16 of this document.

Because the risk factors referred to in this document could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made in this document by us or on our behalf, you should not place undue reliance on any of these forward-looking statements.

Furthermore, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New risk factors will emerge in the future, and it is not possible for us to predict such factors. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those described in any forward-looking statements.

CURRENCY PRESENTATION

In this document, references to "sterling", "pounds sterling", "pound", "£", "pence" and "p" are to the lawful currency of the United Kingdom. References to "€" or "euro" and "euro cents" are to the single currency of the participating member states ("Member States") in the Third Stage of European Economic and Monetary Union of the Treaty Establishing the European Community, as amended from time to time. References to "US dollars", "US$" and "$" are to the United States dollar and references to "cents" are to United States cents, each the lawful currency of the United States of America.

EXCHANGE RATE VARIATION

The following chart indicates (i) for the period from February 26, 2006 through February 26, 2011, our fiscal year end, period average and high and low noon buying rates in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York and (ii) for each calendar month period or portion thereof from February 27, 2011 to November 10, 2011, the monthly period end, period average and high and low noon buying rates, in each case expressed in US dollars per £1.00. The rates below may differ from the actual rates used in the preparation of the combined financial statements and other financial information that appear elsewhere in this document. Our inclusion of these exchange rates is for illustrative purposes only and does not mean that the sterling amounts actually represent such US dollar amounts or that such sterling amounts could have been converted into US dollars at any particular rate, if at all. The noon buying rate of the pound on November 18, 2011 was US$1.58 = £1.00.

	US dollars per £1.00–––––––––––––––––––––––––––––––––––––––––––––––––––––
	High––––––––	Low––––––––	PeriodAverage(1)––––––––	Period End––––––––
Fiscal Year:
February 26, 2006 to February 24, 2007	1.98	1.73	1.87	1.96
February 25, 2007 to February 23, 2008	2.11	1.92	2.01	1.97
February 24, 2008 to February 28, 2009	2.03	1.37	1.77	1.43
March 1, 2009 to February 27, 2010	1.70	1.38	1.59	1.52
February 28, 2010 to February 26, 2011	1.63	1.43	1.54	1.61
Month:
February 27, 2011 to February 28, 2011	1.62	1.62	1.62	1.62
March 2011	1.64	1.60	1.62	1.60
April 2011	1.67	1.61	1.64	1.67
May 2011	1.67	1.61	1.63	1.64
June 2011	1.64	1.60	1.62	1.61
July 2011	1.65	1.59	1.62	1.65
August 2011	1.66	1.62	1.64	1.63
September 2011	1.62	1.54	1.58	1.56
October 2011	1.61	1.54	1.58	1.61
November 2011 (through November 18, 2011)	1.61	1.59	1.59	1.58

(1) The average of the noon buying rates on the last business day of each month during the relevant period for yearly averages and on each business day of the month (or portion thereof) for monthly averages.

OVERVIEW OF THE GROUP

In this document, references to "Tesco", "we", "our", "ours" and "us" refer to Tesco PLC, a public limited company incorporated under the laws of England and Wales, together with our consolidated subsidiaries, unless stated otherwise or the context otherwise requires. The following summary may not contain all the information that may be important to you. Before making an investment decision, you should read this entire document, including the "Risk Factors" section and the financial statements, together with the related notes, included in this document.

Following the implementation of the relevant provisions of the Prospectus Directive (Directive 2003/71/EC) in each member state of the European Economic Area, no civil liability will attach to those persons who are responsible for this summary in any such member state solely on the basis of this summary, unless it is misleading, inaccurate or inconsistent when read together with the other parts of this document. Where a claim relating to the information contained in this document is brought before a court in a member state of the European Economic Area, the claimant may, under the national legislation of that member state, be required to bear the costs of translating this document before legal proceedings are initiated. Civil liability is attached to those persons responsible for this summary including any translation of the summary, but only if the summary is misleading, inaccurate or inconsistent when read together with other parts of the document.

Overview

The following summary should be read as an introduction to the document. Any decision to invest in the notes should be based on consideration of the document as a whole by an investor.

We are the United Kingdom's largest food retailer by sales according to Kantar Worldpanel, with over 80 years of operating history in the United Kingdom's retail food industry. As of February 26, 2011, we owned and operated a total of 5,380 stores in 14 countries, of which 2,715 were in the United Kingdom and 2,665 were located in our other markets. In the 52 weeks ended February 26, 2011, we had revenue of £60.9 billion, a 7% increase over the 52 weeks ended February 27, 2010, and we had revenue of £31.8 billion in the 26 weeks ended August 27, 2011, an 8% increase over the 26 weeks ended August 28, 2010. In the last 14 years, we have rapidly expanded our operations internationally into other markets, comprising Europe, Asia and the western United States. We have also expanded our operations to include non-food retailing of a variety of goods, including general merchandise, clothing and electricals. Since 1997, we have offered a variety of personal finance services and, since 2003, have introduced a range of telecommunication services. We are a multi-channel retailer and sell our goods and services through both our significant store networks and via our website tesco.com. In 2006, we launched Tesco Direct to make our non-food offerings more accessible to customers through our catalog and website in addition to in our stores, enabling them to browse via a catalogue, order online or in-store and have the option to have their order completed via collection in-store or delivered directly to their home.

We believe that our broad customer base, our "every little helps" brand philosophy and our customers' trust in the Tesco brand to provide simple, excellent service that represents good value for money set us apart from our competitors in the United Kingdom and abroad. We intend to use these strengths and the international experience we have gained during our history to further the growth of our business in the United Kingdom and abroad.

Our Strategy

Our vision is to be most highly valued company by the customers we serve, the communities in which we operate, our loyal and committed staff and our shareholders. To realize this vision, we are pursuing the following seven key strategic objectives:

Keep our core UK business strong and growing**.** Our UK market is the core of our business, representing 68% and 72% of our trading profit (at actual exchange rates) in the 52 weeks ended February 26, 2011 and the 26 weeks ended August 27, 2011, respectively. We believe that this strong foundation can continue to provide support for our UK and worldwide growth. We plan to further grow our UK business by continuing to leverage and expand our Tesco Clubcard loyalty program, continuing to develop our store network and refresh store space to provide customers the type of shopping environment most convenient for them, increasing our emphasis on product quality and remaining focused on delivering the best value to all customers.
Become an outstanding international retailer in stores and online**.** We have been expanding into markets outside the United Kingdom since the mid-1990s, with operations in 13 countries outside the United Kingdom and are either the largest or second largest by sales in eight of these markets. In aggregate, our international businesses represented 25% and 26% of our trading profit (at actual exchange rates) in the 52 weeks ended February 26, 2011 and the 26 weeks ended August 27, 2011, respectively. Total international sales increased from £19,423 million in the 52 weeks ended February 27, 2010 to £22,083 million in the 52 weeks ended February 26, 2011, or 14% (at actual exchange rates). Total international trading profit increased from £749 million to £911 million, or 22%, for the same periods. We believe that significant opportunity for future sustained growth and improved long-term returns lies in international markets. With that in mind, we plan to continue our already-successful international expansion by further expanding our business in our existing markets outside the United Kingdom through the introduction of multi-channel and multi-format retailing.
Be as strong in everything we sell as we are in food**.** We have grown sales and expanded our offering of general merchandise, clothing and electrical products and strive to continue to do so going forward. Overall sales in these categories (excluding health & beauty and household goods) increased by 8.8% in the 52 weeks ended February 26, 2011 and represented 15% of total Group sales in that period. We plan to improve our selection of non-food items and our fulfilment options in order to grow our share of the market for the items we sell, and to utilize and improve our global sourcing capabilities to buy better, improve quality and sell more.
To grow retail services in all our markets**.** We want all of our customers, across all of our markets, to have access to our financial, telecoms and online services, which together accounted for 16% of our total trading profit in the 52 weeks ended February 26, 2011. We believe we can do this by successfully leveraging the Group's skill and scale, building on the knowledge we have acquired from our retail services experience in the United Kingdom, Ireland and South Korea and continuing to introduce retail services and product innovations.
Put the community at the heart of what we do**.** We are committed to tackling the issues that matter to our communities and society at large. In furtherance of this strategy, we will continue to work hard to be a good neighbor in the communities in which our stores are located, to demonstrate leadership in environmental issues and to build a long-term sustainable business. For example, we have pledged to become a zero-carbon business by 2050 and opened the world's first zero-carbon supermarket in Ramsey, Cambridgeshire. In July 2011, the Carbon Disclosure Project ranked Tesco one of the top ten global businesses and best global retailer at tackling climate change.
Be a creator of highly valued brands. Our brand has evolved from a logo above a few stores in the United Kingdom to a wide range of store, product and service brands around the world. By building brands through our own products, we offer customers increased value,

choice and quality and promotes customer loyalties. This applies to our retail Tesco brand as well as our pillar brands, such as Finest and Value, and our product brands such as Technika as well as F&F, which is now available in over 450 stores across the UK and in nine other markets across Europe and Asia.

• Build our team so that we can create more value. As our business continues to grow and diversify, we will continue to share operational and leadership excellence across the Group so that we can successfully develop capability and nurture talent throughout our growing business. We will also continue to provide our people with opportunities to develop their skills across new product areas, services and countries. We believe that home-grown managers make valuable business leaders because they understand our culture and approach. To support long-term retention, we currently have almost 30,000 people on development programs across the business to help them gain the knowledge, leadership skills and qualifications for their next roles at Tesco.

Our Key Strengths

We believe our key strengths include our broad customer base, customer-focused culture, strong, experienced management team and supportive and respectful relationship with our staff.

Recent Developments

On November 2, 2011, we issued 3.375% notes in an aggregate principal amount of €750 million due November 2, 2018.

OVERVIEW OF THE OFFERING

The summary below describes the principal terms of the notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The "Description of the Notes" section of this document contains a more detailed description of the terms and conditions of the notes.

Issuer	Tesco PLC.
Notes Offered	$500,000,000 aggregate principal amount of 2.000% Senior Notesdue December 5, 2014 (the "2014 notes").
	$500,000,000 aggregate principal amount of 2.700% Senior Notesdue January 5, 2017 (the "2017 notes").
	We refer to the 2014 notes and the 2017 notes in this documentcollectively as the "notes".
	The 2014 notes and the 2017 notes will, in each case, be issuedunder a fiscal and paying agency agreement expected to be datedas of December 5, 2011 (together, the "FPAA") between us andCitibank, N.A., London Branch, as fiscal agent, paying agent,transfer agent and registrar. The 2014 notes and the 2017 noteswill each be treated as a separate series of notes and, as such, theywill vote and act, and may be redeemed, separately.
Issue Date	December 5, 2011.
Maturity Dates	December 5, 2014 for the 2014 notes and January 5, 2017 for the2017 notes.
Interest Rates	The 2014 notes and the 2017 notes will bear interest from theissue date at the rate of 2.000% and 2.700%, respectively, perannum, payable semi-annually in arrears.
Interest Payment Dates	Interest on the 2014 notes will be paid semi-annually in arrears onJune 5 and December 5 of each year, beginning on June 5, 2012and interest on the 2017 notes will be paid semi-annually inarrears on January 5 and July 5 of each year, beginning on July 5,2012 (in each case, an "interest payment date").
Interest Periods	The first interest period for the notes will be the period from andincluding the issue date to but excluding the first interest paymentdate. Thereafter, the interest periods for the notes will be theperiods from and including each interest payment date to butexcluding the immediately succeeding interest payment date. Thefinal interest period will be the period from and including theinterest payment date immediately preceding the maturity date tothe maturity date.
Regular Record Dates for Interest	For the 2014 notes, the close of business on May 20 or November20 (whether or not a business day) immediately preceding eachinterest payment date. For the 2017 notes, the close of business onJune 20 or December 20 (whether or not a business day)immediately preceding each interest payment date.

Business Day	Any day which is not, in London, England or New York City aSaturday, Sunday, legal holiday or a day on which bankinginstitutions are authorized or obligated by law to close (a"business day").
Day Count Fraction	30/360.
Optional Redemption	We may redeem either or both series of the notes, in whole or inpart, at our option, at any time and from time to time, at aredemption price equal to the greater of (i) 100% of the principalamount of the notes to be redeemed and (ii) as determined by anindependent investment banker, the sum of the present values ofthe applicable remaining scheduled payments discounted to theredemption date on a semi-annual basis (assuming a 360-day yearconsisting of twelve 30-day months) at the treasury rate plus, inthe case of the 2014 notes, 25 basis points, and, in the case of the2017 notes, 30 basis points, together with, in each case, accruedand unpaid interest on the principal amount of the notes to beredeemed to the redemption date.
Redemption for Tax Reasons	In the event of certain tax law changes that would require us topay additional amounts on one or both series of notes, we may,under certain conditions, redeem in whole, but not in part, thenotes of the affected series prior to maturity at a redemption priceequal to 100% of the principal amount of the notes plus accruedand unpaid interest to the date of redemption.
Repurchase Upon a Change ofControl Offer	If a Change of Control Triggering Event occurs, unless we haveredeemed the applicable notes in full, we will be required to makean offer (the "change of control offer") to each holder of theapplicable notes to repurchase all or any part (with any residualequal to $200,000 or an integral multiple of $1,000 in excessthereof) of that holder's applicable notes on the terms set forth inthe notes. In the change of control offer, we will be required tooffer payment in cash equal to 101% of the aggregate principalamount of applicable notes repurchased, plus accrued and unpaidinterest, if any, on the applicable notes repurchased, to the date ofrepurchase.
Payment of Additional Amounts	If we are required by a UK taxing jurisdiction to deduct orwithhold taxes in respect of payment on the notes we will, subjectto certain exceptions, pay additional amounts to noteholders, butunder certain conditions we may be able to exercise our right toredeem the notes.
Covenants of the Issuer	The notes will not specifically prohibit the Issuer from enteringinto a merger, consolidation or similar combination with or intoanother party, or transferring all or substantially all of its assets toanother party, whether or not the other party becomes liable forthe Issuer's obligations under the notes. Such a transaction may,

	however, constitute a change of control described above or, undercertain circumstances, an event of default.
Ranking of the Notes	The notes will be our unsecured and unsubordinated obligationsand will rank pari passu in right of payment among themselvesand with our other unsecured and unsubordinated indebtedness(save for certain obligations required to be preferred by law).
Denominations, Form andRegistration of Notes	The notes will be issued in fully registered form and only indenominations of $200,000 and integral multiples of $1,000 inexcess thereof. The notes will be initially issued as global notes.DTC will act as depositary for the notes. Except as set forthherein, global notes will not be exchangeable for certificatednotes.
Governing Law	The State of New York.
Listing	Prior to the issuance of the notes, we will use our best efforts toobtain the admission of the notes to the Official List and to tradingon the Regulated Market of the London Stock Exchange.
Restrictive Covenants	The FPAA contains covenants restricting our ability to pledge ourassets, secure certain borrowings and create or incur liens on ourproperty. The FPAA does not contain any restrictions on ourability or that of our subsidiaries (i) to secure indebtedness otherthan certain obligations or (ii) to enter into sale and leasebacktransactions.
Defeasance	The notes will be subject to defeasance and covenant defeasanceprovisions in the FPAA.
Further Issuances	We may, from time to time, without notice to or the consent of theholders of the notes, "reopen" each series of notes and create andissue additional notes having identical terms and conditions as the2014 notes or the 2017 notes, as the case may be (or in all respectsexcept for the issue date, issue price, payment of interest accruingprior to the issue date of such additional notes and/or the firstpayment of interest following the issue date of such additionalnotes), so that the additional notes are consolidated and form asingle series of notes with the 2014 notes or the 2017 notes, as thecase may be. We will not issue any additional notes unless suchadditional notes have no more than a de minimis amount oforiginal issue discount or such issuance would constitute a"qualified reopening" for US federal income tax purposes.
Use of Proceeds	The net proceeds of the offering will be used to refinance certainexisting debt of the Issuer and for the Issuer's general corporatepurposes.
Fiscal Agent, Paying Agent,Transfer Agent and Registrar	Citibank, N.A., London Branch.

Transfer Restrictions	The notes have not been and will not be registered under theSecurities Act and are subject to certain restrictions on resale andtransfer.
Timing and Delivery	We currently expect delivery of the notes to occur on or aboutDecember 5, 2011.
Ratings	It is expected that the notes will be rated A3 by Moody's InvestorsService, Inc., A- by Standard & Poor's, a division of TheMcGraw-Hill Companies, Inc. and A- by Fitch Ratings Ltd.,subject to confirmation at closing. A security rating is not arecommendation to buy, sell or hold the notes. There is noassurance that a rating will remain for any given period of time orthat a rating will not be lowered or withdrawn by the relevantrating agency if, in its judgment, circumstances in the future sowarrant. In the event that a rating initially assigned to the notes issubsequently lowered for any reason, no person or entity isobliged to provide any additional support or credit enhancementwith respect to the notes and the market value of the notes is likelyto be adversely affected.
CUSIP
2014 notes	144A: 881575 AE4Regulation S: G87623 JG3
2017 notes	144A: 881575 AF1Regulation S: G87623 JH1
ISIN
2014 notes	144A: US881575AE44Regulation S: USG87623JG33
2017 notes	144A: US881575AF19Regulation S: USG87623JH16

Risk Factors

An investment in the notes involves a high degree of risk. You should refer to "Risk Factors" beginning on page 16 for an explanation of certain risks involved in investing in the notes. You should carefully consider the information under "Risk Factors" and all other information in this document before investing in the notes.

The Issuer

The Issuer, Tesco PLC, is a public limited company incorporated under the laws of England and Wales. Our registered address and the business address of each of our directors is Tesco House, Delamare Road, Cheshunt, Hertfordshire EN8 9SL, United Kingdom and our telephone number is +44 (0) 1992 632222. Our website, at tesco.com, provides additional information about us. Our website and the information contained on it or connected with it shall not be deemed to be incorporated into this document.

The Issuer had an issued share capital of £400,853,979 comprised of 8,017,079,584 ordinary shares with a par value of 5p per share as of October 31, 2011 (being the latest practicable date prior to the publication of this document). All shares are fully paid.

The Issuer's statutory annual financial statements are prepared on the basis of a financial year ending on the last Saturday in February.

RISK FACTORS

Any investment in the notes involves risk. Prospective investors should carefully consider, in light of their own financial circumstances and investment objectives, the following risks before making an investment decision with respect to the notes. If any of the following risks actually occurs, the could have a material adverse effect on the Group's business, financial condition, results of operations and future prospects and the market value of the notes may be adversely affected.

The risks discussed below are those that the Group believes are material, but these risks and uncertainties may not be the only risks that the Issuer and the Group face. Additional risks that are not known to the Issuer or the Group at this time, or that are currently believed to be immaterial, could also have a material adverse effect on the Issuer's and/or the Group's business, financial condition, results of operations, future prospects and the value of the notes. The order in which the following risks are presented is not intended to be an indication of the probability of their occurrence or the magnitude of their potential effects.

Risks Related to Our Business

Business strategy

If our strategy follows the wrong direction or is not efficiently communicated, then our business may suffer.

We need to understand and properly manage strategic risk in order to deliver long-term growth for the benefit of all our stakeholders. Our operations are based on a seven part strategy—(i) to grow our core UK business, (ii) to be an outstanding international retailer in stores and online, (iii) to be as strong in everything we sell as we are in food, (iv) to grow retail services in all our markets, (v) to put our responsibilities to the communities we serve at the heart of what we do, (vi) to be a creator of highly valued trends and (vii) to build our team so that we create more value. Pursuit of this strategy has allowed our business to diversify, and, at a strategic level, diversification and pursuit of growth in emerging markets have the effect of reducing overall risk by avoiding reliance on a small number of business areas. However, by its very nature, diversification also introduces new risks to be managed in areas of the business that are less mature and fully understood.

To ensure we continue to pursue the right strategy, our board of directors discusses strategic issues at each board meeting, and dedicates two full days a year to reviewing our strategy. The Executive Committee of our board of directors also holds specific sessions to discuss strategic issues on a regular basis. We have structured programs for engaging with all of our stakeholders, including customers, employees, investors, suppliers, government, media and non-governmental organizations. We also invest significant resources in ensuring that our strategy is communicated well and understood by the parties who are key to delivering it. The business operates a "Steering Wheel"—a balanced scorecard process whereby we set goals for different areas of our business and assess our overall progress on a quarterly basis—in all countries and significant business units to help manage performance and monitor delivery of our business strategy.

Financial strategy and group treasury risk (excluding Tesco Bank)

Our main financial risks relate to the availability of funds to meet business needs, the risk of default by counter-parties to financial transactions (credit risk), and fluctuations in interest and foreign exchange rates.

Our board of directors and the Executive Committee of our board of directors regularly review our financial strategy, risks and financial performance. Our treasury function is mandated by our board of directors to manage the financial risks that arise in relation to underlying business needs. The function has clear policies and operating parameters, and its activities are routinely reviewed and audited. The function does not operate as a profit center and the undertaking of speculative transactions is not permitted. Our internal audit program reports on our financial control systems.

Pension risks

Our pension arrangements are an important part of our employees' overall benefits package, especially in the United Kingdom. We see them as a strong contributor to our ability to attract and retain good people, our greatest asset.

Since the implementation of IAS 19 "Employee Benefits" there is a risk that the accounting valuation deficit (which is recorded as a liability of our balance sheet) could increase if returns on corporate bonds are higher than the investment return on the pension scheme's assets. IAS 19 requires that defined benefit pension plan obligations be measured at discounted present value (using the projected unit credit method) while plan assets are recorded at fair value, with the net obligation then recorded as a liability on the balance sheet.

We have considered our pension risks and have taken action by increasing contributions and by reducing risk in our investment strategy. In addition, our Pensions and Treasury directors conduct a monthly review of our pension risks, and external advisers and pension fund trustees have been fully engaged to consider our pension deficit and fund performance.

Competition and consolidation

The retail industry is highly competitive. We compete with a wide variety of retailers of varying sizes and face increased competition from UK retailers as well as from international operators in the United Kingdom and overseas.

Failure to compete with competitors on areas including price, product range, quality and service could have an adverse effect on our financial results.

We aim to have a broad appeal in price, range and store format in a way that allows us to compete in different markets. We regularly review markets, trading opportunities and the activities of our competitors. We track performance against a range of measures that customers tell us are critical to their shopping trip experience and constantly monitor customer perceptions of ourselves and our competitors to ensure that we can respond quickly if we need to.

Reputational risk

As the largest retailer in the United Kingdom, expectations of us are high. Failure to protect our reputation and brand could lead to a loss of trust and confidence. This could result in a decline in the customer base and affect our ability to recruit and retain good people.

Like other companies, we must consider potential threats to our reputation and the consequences of reputational damage. Emotional loyalty to the Tesco brand has helped us diversify into new areas such as retail services and non-food and we recognize the commercial imperative to do the right thing for all our stakeholders and avoid the loss of such loyalty. The "Tesco Values" are embedded in the way we do business at every level and our Code of Business Conduct guides our behavior in our dealings with customers, employees and suppliers. We engage with stakeholders in every sphere to take into account their views and try to ensure our strategy reflects them. The launch of the Community Plan (our set of

community outreach programs) has demonstrated our commitment to tackling a wide range of societal and environmental issues. We have high-level committees, including our Corporate Responsibility Committee and Compliance Committee, to help guide and monitor our policies.

Operational threats and performance risk in the business

There is a risk that our business units may fail to achieve their targets and that our business may not deliver its stated strategy in full, particularly since, like all retailers, the business is susceptible to economic downturn that could affect consumer spending.

Our board of directors, the Executive Committee of our board of directors and other operational committees meet regularly to review operational threats. We try to deliver what customers want better than our competitors by understanding and responding to customer behavior. All of our business units have "stretching targets" (aspirational targets for certain key performance indicators) based on the Steering Wheel, and the performance of all business units is monitored continually and reported monthly to our board of directors. Clear goals and objectives are set for the CEOs of our subsidiaries, and they are rewarded for the achievement of such goals and objectives.

Our aim is to have broad appeal to all customers in our different markets, minimizing the impact of changes to the economic climate through diversification.

Property

The continuing acquisition and development of property sites, which forms an intrinsic part of our strategy, carries inherent risks. "Stretching targets" to deliver new space in all our markets may not be achieved, and challenges may arise in relation to finding suitable sites, obtaining planning or other consents and complying with varying country design and construction standards.

We manage the acquisition and development of our property assets carefully. Our property acquisition committee and related committees closely control all aspects of property acquisition, planning and construction processes to ensure that standards are met and risks are minimized. In addition, Group and country Compliance Committees monitor legal and regulatory compliance in all property activities. In particular, the Tesco China Property Company Board closely monitors property matters in China. We have put in place mall management systems to assist tenant management.

Information Technology ("IT") systems and infrastructure

Our business is dependent on efficient IT systems. Any significant failure in the IT processes of our retail operations (for example barcode scanning or supply chain logistics) would impact our ability to trade. We recognize the essential role that IT plays across our operations in allowing us to trade efficiently and to achieve commercial advantage through implementing IT innovations that improve the shopping trip for customers and make life easier for employees. We have extensive controls and reviews in place to maintain the integrity and efficiency of our IT infrastructure. We also have in place processes to deal with IT security incidents. We share systems from across our international operations to ensure consistency of delivery.

People

Our greatest asset is our employees. It is critical to our success to attract, retain, develop and motivate the best people with the right capabilities at all levels of operations. We consider our people policies regularly and are committed to investing in training and development and incentives for our people. Our "Talent Planning" process helps individuals achieve their full potential. We also carry out succession planning to ensure that the needs of the business going forward are considered and provided for. There are clear processes for understanding and responding to employees' needs through our People Management Group, staff surveys, regular performance reviews, involvement of trade unions and regular communication of business developments. In addition, pay, pension and share plan arrangements help us to attract and retain good people.

Product safety

The safety and quality of our products is of paramount importance to us as well as being essential for maintaining customer trust and confidence. A breach in such trust or confidence could affect the size of our customer base and hence financial results.

We have detailed and established procedures for ensuring product integrity at all times, especially for our own label products. There are strict product safety processes and regular management reports. We work in partnership with suppliers to ensure mutual understanding of the standards required. The business also monitors developments in areas such as health, safety and nutrition in order to respond appropriately to changing customer trends and new legislation. We have clear processes for crisis management, pulling together expert teams should we need to respond quickly on issues.

Health and safety

We are committed to providing a safe environment for our staff and customers. Failure to do so could lead to injuries or loss of life.

We operate using stringent processes that reflect best practice, and our policies are monitored and audited regularly. We also have key performance indicators ("KPIs") across the business to help prevent incidents, with quarterly reporting of our performance against these KPIs. Finally, our Group compliance committee and business unit compliance committees regularly monitor compliance with laws and internal policies.

Fraud, compliance and internal controls

As our business grows in size and geographical scope, the potential for fraud and dishonest activity by our suppliers, customers and employees increases. While we believe that the vast majority of our staff are completely honest, there remains the potential for fraud and other dishonest activity at all levels of the business from shop floor to senior management.

We take extensive steps to reduce this risk and are committed to ensuring the appropriate procedures and controls are set out and audited across the business. We have also updated our policies and procedures for compliance with the Bribery Act 2010. Our internal audit and Loss Prevention & Security teams undertake detailed investigations into all business areas and report their findings to the Audit Committee. We also provide clear behavioral guidance to employees through our Tesco Values and the Group Code of Business Conduct. Our compliance committee formulates and monitors implementation of, and compliance with, the relevant policies and procedures, and each business unit completes annual governance returns.

Regulatory, economic and political risks

We are subject to a wide variety of regulations in the different countries in which we operate because of the diverse nature of our business. We may be impacted by regulatory changes in key areas such as planning laws, trading hours and tax rules, as well as by scrutiny by the competition authorities. We may also be impacted by political developments and the economic environment in the countries in

which we operate. We consider these uncertainties in the external environment when developing strategy and reviewing performance. We remain vigilant to future changes in the United Kingdom and abroad primarily through regional CEOs. As part of our day-to-day operations we engage with governmental and non-governmental organizations to ensure the views of our customers and employees are represented and try to anticipate and contribute to important changes in public policy.

Activism and terrorism

A major incident or terrorist event incapacitating management, systems or stores could impact on our ability to trade. In addition to contingency plans, we have security systems and processes that we believe reflect best practice.

Climate change

Our primary environmental risk is climate change. It is essential for us to mitigate this risk thereafter energy efficiency in stores and transportation, the sustainable management of other revenues and waste minimization. We develop environmental policy through engaging with key stakeholders and experts in this field to achieve sustainable growth and minimize our environmental impacts. Our approach is brought together in a consistent manner by the Corporate Responsibility Committee. Policy is reviewed regularly by the Compliance Committee and Corporate Responsibility Committee. We recognize the opportunities for competitive advantage through energy efficiency and look for continuous improvement though innovations and better ways to help customers act responsibly towards the environment. We have also pledged to become a zero-carbon business by 2050 and opened the world's first zero-carbon supermarket in Ramsey, Cambridgeshire. In July 2011, the Carbon Disclosure Project ranked Tesco one of the top ten global businesses and best global retailer at tackling climate change. We are also working to help our customers reduce their carbon footprints by 50% by 2020.

Risks Related to Tesco Bank

In the 53 weeks ended February 28, 2009, we increased our stake in Tesco Bank to 100% from 50%. Tesco Bank primarily operates in the UK retail financial services market offering general insurance (such as motor, home, pet, travel, dental, health and life insurance), credit cards and personal loans, personal saving products, travel money and ATM services, and Tesco Compare, an online insurance and utilities comparison. In addition to the principal risks above that apply generally to the Group as a whole, the section below sets out principal risks relating specifically to Tesco Bank.

Funding and liquidity

Funding risk is the risk that Tesco Bank does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient. Liquidity risk is the risk that Tesco Bank, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure such resources only at excessive cost.

Tesco Bank has a dedicated treasury function responsible for management of funding and liquidity risks within the framework approved by Tesco Bank's board. A number of measures are taken to manage these risks:

• conservative balance sheet structure with prudent risk appetite supported by explicit targets and metrics which enable funding and liquidity to be managed in excess of regulatory requirements;

• strong liquid position with a diversified stock of highly marketable liquid assets that can be used as a buffer against unforeseen impacts on cash flow or in stressed environments;
• lending activities primarily funded by retail deposits;
• daily monitoring and management of key funding and liquidity ratios with monthly reporting to assets and liabilities management committee and Tesco Bank's board of directors;
• regular stress testing undertaken to assess the adequacy of funding; and
• liquidity resources during periods of market dislocation and stress.

External environment

Tesco Bank is exposed to general UK economic conditions as well as general market trends in the areas in which it operates. Economic conditions are subject to significant uncertainty, with commentators split on the sustainability of the economic recovery. General economic and market conditions are likely to have an impact on Tesco Bank's credit portfolios.

Tesco Bank's independent credit risk team, reporting directly to chief risk officer, is responsible for the development and oversight of the credit risk framework and for supporting the business in the implementation of policies and processes. In general, Tesco Bank has a low credit risk appetite with focus on responsible lending and maintaining a risk profile better than the industry average. Credit risk information and performance against risk appetite is regularly reported to Tesco Bank's risk management committee, board risk committee and board of directors.

Whilst credit performance has remained strong and favorable compared to industry averages since 2008, Tesco Bank continues to closely monitor its credit portfolios and make changes to its business acquisition and credit limit management strategies to mitigate, as far as possible, downside economic risks. In addition, the impact of extreme but plausible deterioration in economic conditions is considered as part of Tesco Bank's stress-testing program.

Insurance risk

Tesco Bank is exposed to insurance risks directly through its historic distribution agreement with Royal Bank of Scotland Insurance ("RBSI") and indirectly through its ownership of 49.9% of Tesco Underwriting limited ("TU"), an authorized insurance company.

The key insurance risks within TU relate to underwriting risk and specifically the potential for a major weather event to generate significant home insurance claims or, in relation to motor insurance, the cost of settling bodily injury claims.

The legacy arrangement with RBSI is now in run-off and the remaining primary risk for Tesco Bank is reserving risk, which is the risk that reserves set aside by RBSI will be insufficient to cover the ultimate cost of insurance claims arising. This is particularly relevant to motor insurance claims, where the ultimate cost of large bodily injury claims is uncertain and the time taken to settle such claims can vary significantly, depending on the severity of the injury. Since October 2010, pet, travel and breakdown insurance have all been distributed by Tesco Bank on a "white label" basis. Tesco Bank does not carry the insurance risks associated with these products.

To manage these risks, an independent Tesco Bank insurance risk team, reporting directly to Tesco Bank's chief risk officer, operates as the primary contact across all risk disciplines for the insurance business. In addition, underwriting risks are actively managed within TU with close monitoring of

performance metrics, together with independent oversight conducted by Tesco Bank itself. Performance against insurance risk appetite is monitored closely at a senior level and reported to Tesco Bank's risk management committee, board risk committee and board. To minimize insurance risks, Tesco Bank has a reinsurance program to limit Tesco Bank's exposure above predetermined levels, and the impact of specific motor and home insurance events is considered as part of Tesco Bank's stress-testing program and internal capital adequacy assessment process ("ICAAP").

Regulatory environment

Tesco Bank is subject to significant legislative and regulatory oversight. In particular, Tesco Bank has obligations under the FSMA, the UK Consumer Credit Act 1974, as amended (the "Consumer Credit Act") and the UK Data Protection Act 1998 (the "Data Protection Act").

Under FSMA, Tesco Bank is subject to supervision by the Financial Services Authority ("FSA"), which has substantial powers of intervention, and is required to satisfy certain capital adequacy and liquidity ratios. If Tesco Bank is unable or fails to satisfy these ratios in the future, it could lose its license and, consequently, its ability to transact business. There is currently a significant amount of regulatory change including the continued evolution of capital and liquidity requirements, and current FSA responsibilities are due to migrate to the new Prudential Regulatory Authority and the Financial Conduct Authority. Detailed proposals for the new regulatory authorities are due to be published later this year.

In addition, there remains continued regulatory focus in relation to "conduct risk" or "treating customers fairly" ("TCF"), including continued focus on complaints relating to the sale of Payment Protection Insurance ("PPI").

To manage these risks, Tesco Bank has an independent regulatory risk team that reports directly to the chief risk officer, providing oversight and support to the business to ensure that regulatory risks are identified and managed appropriately. Tesco Bank has minimal appetite for regulatory risks and maintains a control framework, including a suite of risk policies, to comply with regulatory requirements. This framework includes the following:

• regular reporting of regulatory risks to Tesco Bank's risk management committee, board risk committee and board as well as to the FSA;
• significant senior management time and focus allocated to management of regulatory risks and the ongoing regulatory relationship;
• establishment of a TCF board, which is responsible for monitoring and challenging the customer-related aspects of Tesco Bank business and, where appropriate, recommending further action;
• in-house handling of PPI complaints house to improve the customer experience and to ensure that the outcomes are aligned with the policy introduced by Tesco Bank; and
• recognition of a provision for potential customer redress, including compensation that may be required in relation to PPI complaints.

Operational risk

Tesco Bank is exposed to the risk of loss caused by human error, ineffective or inadequately designed processes, system failure or improper conduct (including criminal activity). In general, Tesco Bank has low appetite for operational risk, although it accepts higher risk in the short term as a result of the transformation program, with the operational risk framework overseen by a dedicated unit within

independent risk function. Tesco Bank also maintains risk registers across Tesco Bank that capture and quantify the risks arising in each of the commercial, insurance, operations and central functions area. Operational risk information and performance, including financial crime, against risk appetite, is regularly reported to Tesco Bank's risk management committee, board risk committee and board.

In addition, as a significant amount of Tesco Bank's services and processes are provided by thirdparty service providers, a key operational risk to the business is a failure by an outsourced provider. These third-party services are managed through a series of commercial services agreements with effective oversight arrangements established to ensure such services are delivered in compliance with contractual terms. Notwithstanding anything in this risk factor, this risk factor should not be taken as implying that either the Issuer or the Group will be unable to comply with its obligations as a company with securities admitted to the Official List or, in relation to Tesco Bank, as a supervised firm regulated by the Financial Services Authority.

Transformation program

Tesco Bank has embarked on a significant transformation program to develop and embed its own infrastructure to allow it to migrate systems and support from the Royal Bank of Scotland ("RBS") Group infrastructure. In addition, Tesco Bank has well-developed plans to launch mortgages in 2012, subject to FSA approval, with Vertex to provide application platforms and customer sales and services. Current accounts are another key element in widening Tesco Bank's product range, with the customer proposition and detailed program plans currently being developed, with launch expected in 2012-2013. The addition of new products adds further to the complexity and delivery challenge of the transformation program.

The transformation delivery group ("TDG") has been established as the key governance forum for the delivery of the program objectives. The TDG is chaired by Tesco Bank's chief operating officer, with representation across all areas of Tesco Bank, including commercial, operations, IT, risk and finance. The TDG is supported by program implementation boards and project control committees.

Tesco Bank also has project management disciplines in place, including detailed program plans and risk and issue management to enable effective management of the program scope, delivery timelines and adherence to budget, as well an ongoing program of audit reviews, risk profiles and "health checks", with monthly reporting to Tesco Bank's risk management committee, audit committee and board.

Risks Related to the Notes

We may be able to incur substantially more debt in the future.

We may be able to incur substantial additional indebtedness in the future, including in connection with future acquisitions, some of which may be secured by some or all of our assets. The terms of the notes will not limit the amount of indebtedness we may incur. Any such incurrence of additional indebtedness could exacerbate the related risks that we now face.

An active liquid trading market for the notes may not develop, and the transfer of the notes will be subject to restrictions.

We have applied for the listing of the notes on the Regulated Market. However, we cannot assure you that the notes will be listed on any exchange at the time the notes are delivered to the Initial Purchasers or at any other time. The Initial Purchasers have informed us that they intend to make a market in the notes. However, they are not obligated to do so, and may discontinue such market making at any time without notice. There can be no assurance that an active trading market for the notes will develop, or if one does develop, that it will be sustained.

We have not registered the notes under the Securities Act or any US state securities laws, and we have not agreed to and do not intend to register the notes under the Securities Act or under any other country's securities laws. Therefore, you may not offer or sell the notes, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. You should read the discussion under the heading "Notice to Investors" for further information about the transfer restrictions that apply to the notes. It is your obligation to ensure that your offers and sales of notes within the United States and other countries comply with all applicable securities laws.

Investors in the notes may have limited recourse against the independent auditors.

See "Independent Auditors" for a description of the independent auditors' reports, including language limiting the auditors' scope of duty in relation to such reports and the consolidated financial statements to which they relate. In particular, the May 6, 2011 and May 5, 2010 reports of PricewaterhouseCoopers LLP. with respect to such audited consolidated financial statements, in accordance with guidance issued by The Institute of Chartered Accountants in England and Wales, provide: "This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing". The SEC would not permit such limiting language to be included in a registration statement or a prospectus used in connection with an offering of securities registered under the Securities Act or in a report filed under the Exchange Act. If a US court (or any other court) were to give effect to the language quoted above, the recourse that investors in the notes may have against the independent auditors based on their reports or the consolidated financial statements to which they relate could be limited or precluded altogether.

USE OF PROCEEDS

We expect the net proceeds from the offering to be approximately $996 million (£630 million, translated at the November 18, 2011 exchange rate of $1.58 = £1.00), after deducting certain expenses and issue discounts relating to the offering. We intend to use the net proceeds from the offering to refinance certain existing debt and for general corporate purposes. For more information, see "Capitalization".

CAPITALIZATION

The table below presents our consolidated cash and cash equivalents, total borrowings, total equity and capitalization as of August 27, 2011 on an actual basis and as adjusted to reflect the receipt of the net proceeds of this offering as discussed under "Use of Proceeds", as if the offering had been completed as of August 27, 2011. You should read this table together with "Selected Financial Information", "Use of Proceeds", "Operating and Financial Review—Liquidity and Capital Resources," "Description of the Notes", "Description of Certain Other Indebtedness" and our Group Financial Statements beginning on page F-1 of this document.

The capitalization information presented as adjusted has been prepared for the purpose of showing the effect of the issue of the notes on the applicable items in the table below as if it had occurred on August 27, 2011, and has been prepared for illustrative purposes only. By its nature such information addresses a hypothetical situation and therefore does not reflect the Group's actual financial position. The capitalization information presented as adjusted is compiled on the basis set out in the notes below in a manner consistent with the accounting policies adopted by the Group in preparing the Group Financial Statements.

On November 2, 2011, we issued 3.375% notes in an aggregate principal amount of €750 million due November 2, 2018. Apart from this issuance, there has been no material change in the Group's capitalization since August 27, 2011.

Actual	Adjustmentsfor the netproceeds ofthe Offering	As adjustedfor the netproceeds ofthe Offering––––––––
	(unaudited)(£m)

1,950	630(1)	2,580
597	—	597
392	—	392
		1,613––––––––
4,552	630	5,182––––––––
		––––––––
(1,321)	—	(1,321)
(181)	—	(181)––––––––
(1,502)	—	(1,502)––––––––––––––––

(10,149)	—	(10,149)
(576)	—	(576)
		(32)
		(630)––––––––
(10,757)	(630)	(11,387)––––––––
105	—	105––––––––
(12,154)	(630)	(12,784)––––––––
(7,602)	—	––––––––(7,602)––––––––––––––––
	––––––––1,613––––––––––––––––––––––––––––––––––––––––––––––––(32)—––––––––––––––––––––––––––––––––––––––––––––––––––––––––	As of August 27, 2011––––––––––––––––––––––––––––––––––––––––––––––—––––––––––––––––––––––––––––––––––––––––––––––––—(630)(4)––––––––––––––––––––––––––––––––––––––––––––––––––––––––

	Actual––––––––	––––––––––––––––––––––––––––––––––––––Adjustmentsfor the netproceeds ofthe Offering––––––––(unaudited)(£m)	As adjustedfor the netproceeds ofthe Offering––––––––
Total shareholders' equity	(17,021)	—	(17,021)
Minority interests	(12)	—	(12)
Total equity	(17,033)	—	(17,033)
Total borrowings	(12,154)	(630)(4)	(12,784)
Total capitalization	(29,187)––––––––––––––––	(630)––––––––––––––––	(29,817)––––––––––––––––

(1) Actual cash and cash equivalents includes cash at banks and in hand and short-term deposits. The increase in cash and cash equivalents reflects the receipt of the expected proceeds of the Offering of £633 million, less amounts used to meet fee and expense obligations in respect of this offering of £3 million translated into pounds sterling at the November 18, 2011 exchange rate of $1.58 = £1.00. Please see "Use of Proceeds".

(4) Represents indebtedness incurred as a result of the Offering of £633 million, less amounts used to meet fee and expense obligations in respect of this offering of £3 million, translated into pounds sterling at the November 18, 2011 exchange rate of $1.58 = £1.00. Please see "Use of Proceeds".

(5) Net debt is calculated as total current borrowings and total non-current borrowings less cash and receivables.

(2) Includes finance lease payables.

(3) In the 26 weeks ended August 27, 2011, we approved a plan to dispose of our operations in Japan. These operations, which are expected to be sold by August 27, 2012, were classified as a disposal group. In accordance with IFRS 5 "Non-current assets held for sale and discontinued operations", the assets and liabilities of the disposal group are presented separately in our balance sheet as of August 27, 2011. See "Operating and Financial Review—Reclassification of Certain Financial Information".

SELECTED FINANCIAL INFORMATION

The selected historical financial information as of and for the 52 weeks ended February 26, 2011, the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009 has been derived without material adjustment from our Audited Consolidated Annual Financial Statements beginning on page F-43 of this document. The Audited Consolidated Annual Financial Statements has been prepared in accordance with EU IFRS. EU IFRS differs in significant respects from US GAAP. The selected historical financial information as of and for the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010 has been derived without material adjustment from our Unaudited Consolidated Interim Financial Statements beginning on page F-2 of this document. The Unaudited Consolidated Interim Financial Statements have been prepared on the same basis as our Audited Consolidated Annual Financial Statements and, in the opinion of our management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of this information. The results for any interim period are not necessarily indicative of the results that may be expected for a full year.

In our Unaudited Consolidated Interim Financial Statements, certain line items in the income statement, balance sheet and cash flow statement were reclassified and/or adjusted in accordance with IFRS 5 'Non-Current Assets Held for Sale and "Discontinued Operations" as a result of our approval to dispose of our operations in Japan and IAS 7 "Statement of Cash Flows" as a result of our reclassification of certain assets held by Tesco Bank that had a maturity profile of less than three months. For further detail, please see the footnotes to the tables in this "Selected Financial Information", note 1 and note 4 to the Unaudited Consolidated Interim Financial Statements and "Operating and Financial Review— Reclassification of Certain Financial Information". The relevant items in the selected historical financial information as of August 27, 2011 and for the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010 are presented on this basis, as indicated by footnotes. No historical financial information as of and for the 52 weeks ended February 26, 2011, the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009 has been reclassified or adjusted.

The selected financial and operating information set forth below should be read in conjunction with "Operating and Financial Review". The Group Financial Statements begin on page F-1 of this document.

Selected Group Income Statement Data

	52 weeksendedFebruary 26,2011*–––––––––	52 weeksendedFebruary 27,2010*–––––––––	53 weeksendedFebruary 28,2009*–––––––––
		(£m, except per share information)
Continuing operations:
Revenue (sales excluding VAT)	60,931	56,910	53,898
Cost of sales	(55,871)–––––––––	(52,303)–––––––––	(49,713)–––––––––
Gross profit	5,060	4,607	4,185
Administrative expenses	(1,676)	(1,527)	(1,252)
Profit arising on property-related items	427–––––––––	377–––––––––	236–––––––––
Operating profit	3,811	3,457	3,169
Share of post-tax profits of joint ventures and associates	57	33	110
Finance income	150	265	116
Finance costs	(483)–––––––––	(579)–––––––––	(478)–––––––––
Profit before tax	3,535	3,176	2,917
Taxation	(864)–––––––––	(840)–––––––––	(779)–––––––––
Profit for the period from continuing operations	2,671––––––––––––––––––	2,336––––––––––––––––––	2,138––––––––––––––––––
Discontinued operations:
Loss for the period from discontinued operations	—–––––––––	—–––––––––	—–––––––––
Profit for the year / period (as applicable)	2,671–––––––––	2,336–––––––––	2,138–––––––––
Attributable to:	–––––––––	–––––––––	–––––––––
Owners of the parent	2,655	2,327	2,133
Non-controlling interests	16–––––––––	9–––––––––	5–––––––––
	2,671–––––––––	2,336–––––––––	2,138–––––––––
Earnings per share from continuing and discontinuedoperations:	–––––––––	–––––––––	–––––––––
Basic	33.10p	29.33p	27.14p
Diluted	32.94p	29.19p	26.96p
Earnings per share from continuing operations:
Basic	33.10p	29.33p	27.14p
Diluted	32.94p	29.19p	26.96p

* Results for the 52 weeks ended February 26, 2011 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for 52 weeks ended February 26, 2011 and (ii) for all other operations, results for the twelve months ended February 28, 2011. Results for the 52 weeks ended February 27, 2010 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for 52 weeks ended February 27, 2010 and (ii) for all other operations, results for the twelve months ended February 28, 2010. Results for the 53 weeks ended February 28, 2009 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for 53 weeks ended February 27, 2010 and (ii) for all other operations, results for the twelve months ended February 28, 2009.

	26 weeksendedAugust 27,2011†–––––––––	26 weeksendedAugust 28,2010†–––––––––
	(unaudited)(£m, except per shareinformation)
Continuing operations:Revenue (sales excluding VAT)(1)Cost of sales(1)	31,812(29,340)	29,510(27,179)
Gross profitAdministrative expenses(1)Profit arising on property-related items	–––––––––2,472(780)245	–––––––––2,331(763)261
Operating profitShare of post-tax profits of joint ventures and associatesFinance incomeFinance costs	–––––––––1,9374193(190)–––––––––	–––––––––1,8291398(262)–––––––––
Profit before taxTaxation	1,881(443)–––––––––	1,678(407)–––––––––
Profit for the period from continuing operations	1,448–––––––––	1,271–––––––––
Discontinued operations:Loss for the period from discontinued operations(1)	(65)–––––––––	(82)–––––––––
Profit for the year / period (as applicable)	1,383–––––––––	1,189–––––––––
Attributable to:Owners of the parentNon-controlling interests	–––––––––1,37761,383	–––––––––1,18451,189
Earnings per share from continuing and discontinued operations:BasicDiluted	17.15p17.09p	14.78p14.72p
Earnings per share from continuing operations:BasicDiluted	17.96p17.90p	15.81p15.74p

† Results for the 26 weeks ended August 27, 2011 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 26 weeks ended August 27, 2011; (ii) for Tesco Bank and India, results for the six months ended August 31, 2011; and (iii) for all other operations, results for the 181 days ended August 28, 2011.

Results for the 26 weeks ended August 28, 2010 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 26 weeks ended August 28, 2010; (ii) for Tesco Bank and India, results for the six months ended August 31, 2010; and (iii) for all other operations, results for the 182 days ended August 29, 2010.

(1) In the 26 weeks ended August 27, 2011, we approved a plan to dispose of our operations in Japan. These operations, which are expected to be sold by August 27, 2012, were classified as a disposal group. In accordance with IFRS 5 "Non-Current Assets Held for Sale and Discontinued Operations", the net results of our operations in Japan were presented separately in our Unaudited Consolidated Interim Financial Statements under "Loss before tax on discontinued operations" (with corresponding adjustments made to the amounts under "Revenue", "Cost of sales", and "Administrative expenses") in the income statement for the 26 weeks ended August 27, 2011 and, for comparative purposes, the income statement for the 26 weeks ended August 28, 2010, which reclassified amounts are presented in the table above. Please see note 4 to the Unaudited Consolidated Interim Financial Statements for further details.

Reconciliation of Underlying Profit Before Tax from Continuing Operations to Profit Before Tax

	52 weeksendedFebruary 26,2011†–––––––––	52 weeksendedFebruary 27,2010†–––––––––	53 weeksendedFebruary 28,2009†–––––––––
	(£m, except per share information)
Non-IFRS measure: underlying profit before tax(1)
Profit before tax from continuing operations	3,535	3,176	2,917
Adjustments for:
IAS 32 and IAS 39 "Financial instruments" – Fair value
remeasurements	(19)	(151)	88
IAS 19 "Employee benefits" – non-cash Group Income Statement
charge for pensions	113	24	27
IAS 17 "Leases" – impact of annual uplifts in rent and
rent-free periods	50	41	27
IFRS 3 "Business Combinations" – intangible asset amortization
charges and costs arising from acquisitions	42	127	32
IFRIC 13 "Customer Loyalty Programmes" – fair value of awards	8	14	33
IAS 36 "Impairment of Assets" – impairment of goodwill arising
on acquisitions	55	131	—
Restructuring costs	29–––––––––	33–––––––––	—–––––––––
Underlying profit before tax from continuing operations	3,813––––––––––––––––––	3,395––––––––––––––––––	3,124––––––––––––––––––
Underlying diluted earnings per share from continuing
operations	35.72p	31.66p	28.87p

Results for the 52 weeks ended February 27, 2010 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 52 weeks ended February 27, 2010 and (ii) for all other operations, results for the twelve months ended February 28, 2010.

Results for the 53 weeks ended February 28, 2009 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 53 weeks ended February 27, 2010 and (ii) for all other operations, results for the twelve months ended February 28, 2009.

(1) Underlying profit before tax is not defined by IFRS and is used by management internally to measure and analyze performance. It is defined as profit before taxation for the year / period (as applicable) from continuing operations, excluding fair value re-measurements of financial instruments, non-cash charges, goodwill impairments and restructuring costs. Underlying profit before tax from continuing operations is not a presentation made in accordance with IFRS, is not a measure of financial condition, liquidity or profitability and should not be considered as an alternative to net income determined in accordance with IFRS or operating cash flows determined in accordance with IFRS. We believe that inclusion of underlying profit before tax from continuing operations in this document is appropriate to provide additional information to investors about our operating performance and to provide a measure of operating results unaffected by volatility of accounting for financial instruments and other significant items. Because not all companies calculate or present underlying profit before tax from continuing operations identically, this presentation of underlying profit before tax from continuing operations may not be comparable to other similarly titled measures of other companies. This table reconciles our profit before tax from continuing operations presented above to our underlying profit before tax from continuing operations for the periods presented.

	26 weeksendedAugust 27,2011†	26 weeksendedAugust 28,2010†–––––––––
	–––––––––	(unaudited)(£m, except per shareinformation)
Non-IFRS measure: underlying profit before tax(1)
Profit before tax from continuing operations(2)	1,881	1,678
Adjustments for:
IAS 32 and IAS 39 "Financial instruments" – Fair value remeasurements	(32)	(18)
IAS 19 "Employee benefits" – non-cash Group Income Statement charge
for pensions	29	85
IAS 17 "Leases" – impact of annual uplifts in rent and rent-free periods	19	20
IFRS 3 "Business Combinations" – intangible asset amortization charges
and costs arising from acquisitions	12	21
IFRIC 13 "Customer Loyalty Programmes" – fair value of awards	13	4
IAS 36 "Impairment of Assets" – impairment of goodwill arising on acquisitions	—	—
Restructuring costs	—–––––––––	20–––––––––
Underlying profit before tax from continuing operations	1,922–––––––––	1,810–––––––––
Underlying diluted earnings per share from continuing operations	–––––––––18.30p	–––––––––16.98p

(2) Profit before tax from continuing operations for the 26 weeks ended August 28, 2010 is the reclassified amount presented in our Unaudited Consolidated Interim Financial Statements in accordance with IFRS 5 "Non-Current Assets Held for Sale and Discontinued Operations". Please see footnote 1 to the Selected Group Income Statement Data table for the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010 above and note 4 to the Unaudited Consolidated Interim Financial Statements for further details.

Reconciliation of Operating Profit to Trading Profit

	52 weeksendedFebruary 26,2011†–––––––––	52 weeksendedFebruary 27,2010†–––––––––	53 weeksendedFebruary 28,2009†–––––––––
		(£m, except per share information)
Non-IFRS measure: trading profit(1)
Operating profit	3,811	3,457	3,169
Adjustments for:
Profits arising on property-related items	(427)	(377)	(236)
IAS 19 "Employee benefits" – non-cash Group Income Statement
charge for pensions(2)	95	(24)	52
IAS 17 "Leases" – impact of annual uplifts in rent and
rent-free periods(3)	66	51	36
IFRS 3 "Business Combinations" – intangible asset amortization
charges and costs arising from acquisitions	42	127	32
IFRIC 13 "Customer Loyalty Programmes" – fair value of awards	8	14	33
IAS 36 "Impairment of Assets" – impairment of goodwill arising
on acquisitions	55	131	—
Restructuring costs	29	33	—
Trading profit	–––––––––3,679–––––––––	–––––––––3,412–––––––––	–––––––––3,086–––––––––
	–––––––––	–––––––––	–––––––––

(2) The finance costs element of non-cash pension adjustment is excluded from trading profit (as trading profit excludes net finance costs).

(3) The JV element of non-cash lease straight-lining is excluded from trading profit (as trading profit excludes net finance costs).

(1) Trading profit is not defined by IFRS and is used by management internally to measure and analyze performance. It is defined as operating profit for the year / period (as applicable), excluding profits arising on property-related items, fair value re-measurements of financial instruments, non-cash charges, goodwill impairments and restructuring costs. Trading profit is not a presentation made in accordance with IFRS, is not a measure of financial condition, liquidity or profitability and should not be considered as an alternative to net income determined in accordance with IFRS or operating cash flows determined in accordance with IFRS. We believe that inclusion of trading profit in this document is appropriate to provide additional information to investors about our operating performance and to provide a measure of operating results unaffected by volatility of accounting for financial instruments and other significant items. Because not all companies calculate or present trading profit identically, this presentation of trading profit may not be comparable to other similarly titled measures of other companies. This table reconciles our operating profit presented above to our trading profit for the periods presented.

	26 weeksendedAugust 27,2011†–––––––––	26 weeksendedAugust 28,2010†–––––––––
		(unaudited)(£m, except per shareinformation)
Non-IFRS measure: trading profit(1)
Operating profit(2)	1,937	1,829
Adjustments for:
Profits arising on property-related items	(245)	(261)
IAS 19 "Employee benefits" – non-cash Group Income Statement charge
for pensions(3)	33	72
IAS 17 "Leases" – impact of annual uplifts in rent and rent-free periods(4)	23	25
IFRS 3 "Business Combinations" – intangible asset amortization charges and
costs arising from acquisitions	12	21
IFRIC 13 "Customer Loyalty Programmes" – fair value of awards	13	4
IAS 36 "Impairment of Assets" – impairment of goodwill arising on
acquisitions	—	20
Restructuring costs	—	—
Trading profit	–––––––––1,773–––––––––	–––––––––1,710–––––––––
	–––––––––	–––––––––

(2) Operating profit for the 26 weeks ended August 28, 2010 is the reclassified amount presented in our Unaudited Consolidated Interim Financial Statements in accordance with IFRS 5 "Non-Current Assets Held for Sale and Discontinued Operations". Please see footnote 1 to the Selected Group Income Statement Data table for the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010 above and note 4 to the Unaudited Consolidated Interim Financial Statements for further details.

(3) The finance costs element of non-cash pension adjustment is excluded from trading profit (as trading profit excludes net finance costs).

(4) The JV element of non-cash lease straight-lining is excluded from trading profit (as trading profit excludes net finance costs).

Selected Group Balance Sheet Data

	As ofFebruary 26,2011–––––––––	As ofFebruary 27,2010–––––––––	As ofAugust 27,2011–––––––––
		(£m)	(unaudited)
Goodwill and other intangible assets	4,338	4,177	4,536
Property, plant and equipment	24,398	24,203	25,495
Investment property	1,863	1,731	2,023
Other investments(1)	1,108	863	1,277
Loans and advances to customers	2,127	1,844	1,982
Derivative financial instruments	1,139	1,250	1,494
Other non-current assets	364–––––––––	190–––––––––	374–––––––––
Non-current assets	35,337–––––––––	34,258–––––––––	37,181–––––––––
Inventories	3,162	2,729	3,630
Trade and other receivables(1)	2,314	1,888	2,743
Loans and advances to customers	2,514	2,268	2,577
Cash and cash equivalents(1)	1,870	2,819	1,950
Non-current assets classified as held for sale and assets of
the disposal group(2)	431	373	489
Other current assets(1)	1,578–––––––––	1,688–––––––––	723–––––––––
Current assets	11,869–––––––––	11,765–––––––––	12,112–––––––––
Total assets	47,206–––––––––	46,023–––––––––	49,293–––––––––
Trade and other payables	(10,484)	(9,442)	(11,177)
Borrowings	(1,386)	(1,529)	(1,321)
Customer deposits	(5,074)	(4,357)	(5,122)
Liabilities directly associated with the disposal group(2)	—	—	(113)
Other current liabilities	(787)–––––––––	(687)–––––––––	(1,021)–––––––––
Current liabilities	(17,731)–––––––––	(16,015)–––––––––	(18,754)–––––––––
Net current liabilities	(5,862)–––––––––	(4,250)–––––––––	(6,642)–––––––––
Borrowings	(9,689)	(11,744)	(10,149)
Post-employment benefit obligations	(1,356)	(1,840)	(1,576)
Deferred tax liabilities	(1,094)	(795)	(1,103)
Other non-current liabilities	(713)–––––––––	(948)–––––––––	(678)–––––––––
Non-current liabilities	(12,852)–––––––––	(15,327)–––––––––	(13,506)–––––––––
Total liabilities	(30,583)–––––––––	(31,342)–––––––––	(32,260)–––––––––
Net assets	16,623–––––––––	14,681–––––––––	17,033–––––––––
Equity attributable to owners of the parent	16,535	14,596	17,021
Non-controlling interests	88–––––––––	85–––––––––	12–––––––––
Total equity	16,623––––––––––––––––––	14,681––––––––––––––––––	17,033––––––––––––––––––

(1) In the 26 weeks ended August 27, 2011, we identified certain assets held by Tesco Bank that had a maturity profile of less than three months that would be more appropriately classified as cash and cash equivalents in accordance with IAS 7 "Statement of Cash Flows". The assets identified comprised loans and advances to banks, certificates of deposit (included within other investments) and other receivables. The amounts relating to these balances have accordingly been reclassified in our above balance sheets as of August 27, 2011 as cash and cash equivalents but have not been reclassified in the above balance sheets as of February 26, 2011 and February 27,

The impact of these reclassifications, if they were to be made, with no change to net assets, would be to:

increase cash and cash equivalents by £558 million and £283 million as of February 26, 2011 and February 27, 2010, respectively, such that cash and cash equivalents was £2,428 million and £3,102 million as of February 26, 2011 and February 27, 2010, respectively;
decrease other investments by £170 million and £165 million as of February 26, 2011 and February 27, 2010, respectively, such that other investments were £938 million and £698 million as of February 26, 2011 and February 27, 2010, respectively;
decrease loans and advances to banks by £404 million and £144 million as of February 26, 2011 and February 27, 2010, respectively, such that loans and advances to banks were £nil as of February 26, 2011 and February 27, 2010; and
increase trade and other receivables by £16 million and £26 million as of February 26, 2011 and February 27, 2010, respectively, such that trade and other receivables were £2,330 million and £1,914 million as of February 26, 2011 and February 27, 2010, respectively.
(2) In the 26 weeks ended August 27, 2011, we approved a plan to dispose of our operations in Japan. These operations, which are expected to be sold by August 27, 2012, were classified as a disposal group. In accordance with IFRS 5 "Non-current assets held for sale and discontinued operations", the assets and liabilities of the disposal group are presented separately under "Assets of the disposal group" in our balance sheet as of August 27, 2011. These assets were included in "Non-current assets classified as held for sale" in our balance sheet as of August 28, 2010. Please see note 4 to the Unaudited Consolidated Interim Financial Statements for further details.

Selected Group Cash Flow Data

	52 weeksendedFebruary 26,2011†–––––––––	52 weeksendedFebruary 27,2010†–––––––––	53 weeksendedFebruary 28,2009†–––––––––
		(£m)
Cash flows from operating activities
Cash generated from operations	5,366	5,947	4,978
Interest paid	(614)	(690)	(562)
Corporation tax paid	(760)–––––––––	(512)–––––––––	(456)–––––––––
Net cash from operating activities	3,992–––––––––	4,745–––––––––	3,960–––––––––
Net cash used in investing activities
Acquisition of subsidiaries, net of cash acquired	(89)	(65)	(1,275)
Proceeds from sale of property, plant and equipment	1,906	1,820	994
Purchase of property, plant and equipment and
investment property	(3,178)	(2,855)	(4,487)
Proceeds from sale of intangible assets	3	4	—
Purchase of intangible assets	(373)	(163)	(220)
Increase in loans to joint ventures	(219)	(45)	(242)
Decrease in loans to joint ventures	25	—	—
Investments in joint ventures and associates	(174)	(4)	(30)
Investments in short-term investments	(1,264)	(1,918)	(1,233)
Proceeds from sale of short-term investments	1,314	1,233	360
Dividends received from joint ventures	62	35	69
Interest received	128	81	90
Net cash used in investing activities	–––––––––(1,859)	–––––––––(1,877)	–––––––––(5,974)
Cash flows from financing activities	–––––––––	–––––––––	–––––––––
Proceeds from issue of ordinary share capital	98	167	130
Increase in borrowings	2,175	862	7,387
Repayment of borrowings	(4,153)	(3,601)	(2,733)
Repayment of obligations under finance leases	(42)	(41)	(18)
Dividends paid to equity owners	(1,081)	(968)	(883)
Dividends paid to non-controlling interests	(2)	(2)	(3)
Own shares purchased	(31)–––––––––	(24)–––––––––	(265)–––––––––
Net cash from financing activities	(3,036)	(3,607)	3,615
Net (decrease)/increase in cash and cash equivalents	–––––––––(903)–––––––––	–––––––––(739)–––––––––	–––––––––1,601–––––––––
Cash and cash equivalents at beginning of year	–––––––––2,819	–––––––––3,509	–––––––––1,788
Effect of foreign exchange rate changes	(46)–––––––––	49–––––––––	120–––––––––
Cash and cash equivalents at end of year	1,870––––––––––––––––––	2,819––––––––––––––––––	3,509––––––––––––––––––

† Results for the 52 weeks ended February 26, 2011 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 52 weeks ended February 26, 2011 and (ii) for all other operations, results for the twelve months ended February 28, 2011. Results for the 52 weeks ended February 27, 2010 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 52 weeks ended February 27, 2010 and (ii) for all other operations, results for the twelve months ended February 28, 2010. Results for the 53 weeks ended February 28, 2009 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 53 weeks ended February 27, 2010 and (ii) for all other operations, results for the twelve months ended February 28, 2009.

	26 weeksendedAugust 27,2011†–––––––––	26 weeksendedAugust 28,2010†–––––––––
	(unaudited)(£m)
Cash flows from operating activities
Cash generated from operations	2,430	2,399
Interest paid	(135)	(246)
Corporation tax paid	(277)–––––––––	(319)–––––––––
Net cash from operating activities(1)	2,018–––––––––	1834–––––––––
Net cash used in investing activities
Acquisition of subsidiaries, net of cash acquired	(139)	(86)
Proceeds from sale of property, plant and equipment and non-current assets
classified as held for sale	569	1,239
Purchase of property, plant and equipment and investment property	(1,786)	(1,818)
Proceeds from sale of intangible assets	—	1
Purchase of intangible assets	(173)	(170)
Increase in loans to joint ventures	(1)	—
Decrease in loans to joint ventures	113	3
Investments in joint ventures and associates	(5)	(16)
Proceeds from sale of short-term and other investments(1)	(934)	(1,299)
Investments in short-term investments(1)	1,050	1,366
Dividends received from joint ventures and associates	27	34
Interest received	23–––––––––	82–––––––––
Net cash used in investing activities(1)	(1,256)–––––––––	(664)–––––––––
Cash flows from financing activities
Proceeds from issue of ordinary share capital	23	46
Increase in borrowings	948	805
Repayment of borrowings	(1,081)	(1,849)
Repayment of obligations under finance leases	(23)	(20)
Dividends paid to equity owners	(811)	(730)
Dividends paid to non-controlling interests	(3)	(2)
Own shares purchased	(290)–––––––––	(24)–––––––––
Net cash from financing activities	(1,237)–––––––––	(1,774)–––––––––
Net decrease in cash and cash equivalents(1)	(475)–––––––––	(604)–––––––––
Cash and cash equivalents at beginning of year	2,428	3,102
Effect of foreign exchange rate changes	7–––––––––	(39)–––––––––
Cash and cash equivalents at end of year	1,960––––––––––––––––––	2,459––––––––––––––––––

results for the 26 weeks ended August 28, 2010; (ii) for Tesco Bank and India, results for the six months ended August 31, 2010; and (iii) for all other operations, results for the 182 days ended August 29, 2010.

receivables. The amounts relating to these balances have accordingly been reclassified in our cash flow statement for the 26 weeks ended August 28, 2010 as cash and cash equivalents but have not been reclassified in the above our cash flow statement for the 52 week periods ended February 26, 2011, February 27, 2010 and February 28, 2009. The impact of these reclassifications, if they were to be made, would be to:

increase cash flows from operating activities by £270 million and £1,421 million in the 52 weeks ended February 26, 2011 and February 28, 2009, respectively, and decrease cash flows from operating activities by £1,303 million in the 52 weeks ended February 27, 2010;
decrease net cash used in investing activities by £5 million, £165 million and £nil in the 52 weeks ended February 26, 2011, the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009, respectively;
decrease the net decrease in cash and cash equivalents cash by £275 million in the 52 weeks ended February 26, 2011, increase the net decrease in cash and cash equivalents by £1,138 million for the 52 weeks ended February 27, 2010 and increase the net increase in cash and cash equivalents by £1,421 million in the 53 weeks ended February 28, 2009; and
increase cash and cash equivalents by £558 million, £283 million and £1,421 million as of February 26, 2011, February 27, 2010 and February 28, 2009, respectively.

Selected Reconciliation of Group Net Cash Flow to Movement in Net Debt

	52 weeksendedFebruary 26,2011†–––––––––	52 weeksendedFebruary 27,2010†–––––––––
		(£m)	–––––––––
Net (decrease)/increase in cash and cash equivalents	(903)	(739)	1,601
Adjustments for:
Investment in Tesco Bank	(446)	(230)	—
Elimination of net decrease / (increase) in Tesco Bank cash
and cash equivalents	56	(167)	(37)
Debt acquired on acquisition(s)	(17)	—	(611)
Transfer of joint venture loans receivable on acquisition
of Tesco Bank	—	—	(91)
Net cash outflow to repay debt and lease financing	2,870	2,780	(4,636)
Dividend received from Tesco Bank	150	150	—
(Decrease) / increase in short-term investments	(292)	81	873
Increase / (decrease) in joint venture loan receivables	159	45	242
Other non-cash movements	(438)–––––––––	(249)–––––––––	(759)–––––––––
(Increase) / decrease in net debt in the year / period
(as applicable)	1,139–––––––––	1,671–––––––––	(3,418)–––––––––
Opening net debt	(7,929)	(9,600)	(6,182)
Closing net debt	–––––––––(6,790)	–––––––––(7,929)	–––––––––(9,600)
	––––––––––––––––––	––––––––––––––––––	––––––––––––––––––

	26 weeksendedAugust 27,2011†–––––––––	26 weeksendedAugust 28,2010†–––––––––
	(unaudited)(£m)
Net (decrease)/increase in cash and cash equivalents	(475)	(604)
Adjustments for:
Investment in Tesco Bank	(50)	(149)
Elimination of net decrease / (increase) in Tesco Bank cash and
cash equivalents	192	(204)
Debt acquired on acquisition(s)	(98)	(6)
Transfer of joint venture loans receivable on acquisition of Tesco Bank	—	—
Net cash outflow to repay debt and lease financing	310	1,064
Dividend received from Tesco Bank	—	—
(Decrease) / increase in short-term investments	(425)	(136)
Increase / (decrease) in joint venture loan receivables	(112)	(11)
Other non-cash movements	(154)–––––––––	348–––––––––
(Increase) / decrease in net debt in the year / period (as applicable)	(812)–––––––––	302–––––––––
Opening net debt	(6,790)	(7,929)
Closing net debt	–––––––––(7,602)–––––––––	–––––––––(7,627)–––––––––
	–––––––––	–––––––––

OPERATING AND FINANCIAL REVIEW

This review of our financial condition and results of operations for the periods indicated below contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on our current expectations, estimates, assumptions and projections about our industry, business and future financial results. Actual results could differ materially from the results contemplated by these forward-looking statements because of a number of factors, including those discussed in the sections of this document entitled "Risk Factors," "Information Regarding Forward-Looking Statements" and other sections of this document.

The unaudited interim financial information for the periods indicated below include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the unaudited interim period. The interim results are not necessarily indicative of the results that may be expected for a full year.

The financial and operating information set forth below should be read in conjunction with "Selected Financial Information", and our Group Financial Statements beginning on page F-1 of this document.

Overview

We are the United Kingdom's largest food retailer by sales (according to Kantar Worldpanel), with over 80 years of operating history in the United Kingdom's retail food industry. As of February 26, 2011, we owned and operated a total of 5,380 stores in 14 countries, of which 2,715 were in the United Kingdom and 2,665 were located in our other markets. In the 52 weeks ended February 26, 2011, we had revenue of £60.9 billion, a 7% increase over the 52 weeks ended February 27, 2010, and we had revenue of £31.8 billion in the 26 weeks ended August 27, 2011, an 8% increase over the 26 weeks ended August 28, 2010. In the last 14 years, we have rapidly expanded our operations internationally into other markets, comprising Europe, Asia and the western United States. We have also expanded our operations to include non-food retailing of a variety of goods, including general merchandise, clothing and electricals. Since 1997, we have offered a variety of personal finance services and, since 2003, have introduced a range of telecommunication services. We are a multi-channel retailer and sell our goods and services through both our significant store networks and via our website tesco.com. In 2006, we launched Tesco Direct to make our non-food offerings more accessible to customers through our catalog and website in addition to in our stores, enabling them to browse via a catalogue, order online or in-store and have the option to have their order completed via collection in-store or delivered directly to their home.

We have a well-established and consistent strategy for growth, which has allowed us to strengthen our core UK business and drive expansion into international markets and non-food markets (both in the United Kingdom and internationally). In 1997, we set our strategy to grow the core business and diversify with new products and services in existing and new markets. This strategy enabled us to deliver strong, sustained growth over the past 14 years. We have followed customers into large expanding markets in the United Kingdom – such as financial services, general merchandise and telecommunications – and new markets abroad, initially in Europe and Asia and more recently in the United States.

In order to reflect changing consumer needs and the increasingly global nature of our business, we have evolved our strategy, which now has seven parts. The objectives of the strategy, as discussed more fully in "Business" are:

to grow the core UK business;
to be an outstanding international retailer in stores and online;
to be as strong in everything we sell as we are in food;
to grow retail services on all our markets;
to put our responsibilities to the communities we serve at the heart of what we do;
to be a creator of highly valued brands; and
to build our team so that we create more value.

Business Segments

Our five business segments, based on our management and internal reporting structure, can be described as follows: operations in the United Kingdom excluding Tesco Bank ( "United Kingdom" or "UK segment"), operations in Europe excluding the United Kingdom ("Europe"), operations in Asia ("Asia"), operations in the United States ("United States"), and Tesco Bank operations ("Tesco Bank"). Our UK segment includes all of our operations in the United Kingdom (other than Tesco Bank). Our Europe segment includes our operations in the Republic of Ireland, Poland, Hungary, the Czech Republic, Slovakia and Turkey. Our Asia segment includes our operations in South Korea, Thailand, China, Malaysia, India and Japan. However, because we announced our intention to sell our operations in Japan by August 27, 2012, we have classified our operations in Japan as a discontinued operation, and as such have presented the results of the operations separately in our balance sheet and income statement as of and for the 26 weeks ended August 27, 2011 and, for comparative purposes, our balance sheet and income statement as of and for the 26 weeks ended August 28, 2010. Our US segment includes all of our operations in the United States. Our Tesco Bank segment includes all of our operations relating to the provision of financial services and products to the United Kingdom personal customers. When we refer to the results of the "Group" or to "Group" operations, we refer to the combined results of our five segments. When we refer to the results of "International", we refer to the combined results of our Europe, Asia and US segments.

Fiscal Year and Interim Period

We have a 52-week fiscal year (or, in the case of every sixth year, 53 weeks), which ends on the last Saturday in February. Results for the 52 weeks ended February 26, 2011 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 52 weeks ended February 26, 2011 and (ii) for all other operations, results for the twelve months ended February 28, 2011. Results for the 52 weeks ended February 27, 2010 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 52 weeks ended February 27, 2010 and (ii) for all other operations, results for the twelve months ended February 28, 2010. Results for the 53 weeks ended February 28, 2009 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 53 weeks ended February 27, 2010 and (ii) for all other operations, results for the twelve months ended February 28, 2009.

We have a 26-week interim period, which ends on the last Saturday in August. Results for the 26 weeks ended August 27, 2011 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 26 weeks ended August 27, 2011; (ii) for Tesco Bank and India, results for the six

months ended August 31, 2011; and (iii) for all other operations, results for the 181 days ended August 28, 2011. Results for the 26 weeks ended August 28, 2010 include: (i) for the United Kingdom, the Republic of Ireland and the United States, results for the 26 weeks ended August 28, 2010; (ii) for Tesco Bank and India, results for the six months ended August 31, 2010; and (iii) for all other operations, results for the 182 days ended August 29, 2010.

Reclassification of Certain Financial Information

The net results of these operations were presented separately in the income statement for the 26 weeks ended August 27, 2011 and, for comparative purposes, the income statement for the 26 weeks ended August 28, 2010.
The assets and liabilities of the disposal group were presented separately under "Assets of the disposal group" in our balance sheet as of August 27, 2011. These assets were included in "Noncurrent assets classified as held for sale" in our balance sheet as of August 28, 2010.

For further details, see note 4 to the Unaudited Consolidated Interim Financial Statements.

In addition, in the 26 weeks ended August 27, 2011, we identified certain assets held by Tesco Bank that had a maturity profile of less than three months that would be more appropriately classified as cash and cash equivalents in accordance with IAS 7 "Statement of Cash Flows". The assets identified comprised loans and advances to banks, certificates of deposit and other receivables. This resulted in the following presentation and reclassification in our Unaudited Consolidated Interim Financial Statements:

Amounts relating to these balances under "Other investments", "Trade and other receivables" and "Cash and cash equivalents" were reclassified in the balance sheet as of August 27, 2011 and, for comparative purposes, the balance sheets as of February 26, 2011 and August 28, 2010.
Amounts relating to these balances (under "Cash generated from operations", as well as, "Investments in short-term and other investments" and "Proceeds from sale of short-term and other investments" (which are included in "Net cash used in investing activities") were reclassified in the cash flow statement for the 26 weeks ended August 27, 2011 and, for comparative purposes, the cash flow statement for the 26 weeks ended August 28, 2010.

For further details, see note 1 to the Unaudited Consolidated Interim Financial Statements.

All historical financial information in this prospectus as of and for the 52 weeks ended February 26, 2011, the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009 are derived from the Audited Consolidated Annual Financial Statements and have not been reclassified or adjusted to reflect

the reclassification of Japan as a disposal group or the reclassification of certain Tesco Bank assets that had a maturity profile of less than three months.

Factors Affecting Our Operating Results

The following discussion summarizes the significant factors and events affecting our financial condition and results of operations for the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010; the 52 weeks ended February 26, 2011, the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009, and should be read in conjunction with our financial statements and accompanying notes included elsewhere in this document. We intend for this discussion to provide information that will assist in your understanding of our financial statements, the changes in certain key items in those financial statements from year to year or period to period (as applicable), and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of our five segments, to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole.

Throughout this section, we refer not only to "revenues" but also to "sales," by which we mean revenues plus value added tax ("VAT"), a tax levied on the sale of goods and services in several of our markets, including the United Kingdom, which we are required to collect from our customers when they make purchases from us. In accordance with accounting policy, revenues are recorded net of VAT. However, we believe the use of sales is helpful as it allows us to evaluate our financial data with reference to the prices actually paid by consumers. Our statutory reported revenue includes the accounting impact of IFRIC 13 (Customer Loyalty Programmes); however, all other numbers including the calculation of trading margin exclude this impact. Our Audited Consolidated Annual Financial Statements and Unaudited Consolidated Interim Financial Statements provide information based on revenues.

The United Kingdom is the source of the majority of our revenues, representing 66% of our revenues in the 52 weeks ended February 26, 2011 and 66% of our revenues in the 26 weeks ended August 27, 2011. In the 52 weeks ended February 26, 2011 and the 26 weeks ended August 27, 2011, our revenue growth in the United Kingdom was primarily due to the impact of net new space (representing stores opened in the period less stores closed in the period) and also an increase in petrol sales. Sales for our UK business segment (including petrol) increased by 5.5% in the 52 weeks ended February 26, 2011 compared to the 52 weeks ended February 27, 2010, with a 2.4% like-for-like sales increase, and increased by 7.1% in the 26 weeks ended August 27, 2011 compared to the 26 weeks ended August 28, 2010, with a 3.5% like-for-like sales increase (most of which was attributable to increased petrol prices). Like-for-like sales represent a comparison of period-on-period sales of stores that have been operating for more than one year. Like-for-like sales (excluding petrol) in the UK during the second half of the 52 weeks ended February 26, 2011 and the 26 weeks ended August 27, 2011 increased by 0.8% and 0.5%, respectively, primarily due to a period of unusually subdued industry growth in the UK. The market demand in non-food categories was particularly challenging, especially electronics and entertainment which are two of our largest product groups. However, our performance in food was substantially better, and positive in like-for-like terms.

We have continued to expand our International operations. Sales growth for our combined International segment was strong in the 52 weeks ended February 26, 2011 (increasing by 13.7% compared to the 52 weeks ended February 27, 2010) and in the 26 weeks ended August 27, 2011 (increasing by 12.3% compared to the 26 weeks ended August 28, 2010), largely due to our international store expansion, remodeling and converting older hypermarkets into the Extra format and like-for-like sales growth. Margins in our combined International segment continued to improve in the 52 weeks ended February 26, 2011 (compared to the 52 weeks ended February 27, 2010) and in the 26 weeks ended August 27, 2011 (compared to the 26 weeks ended August 28, 2010).

Our non-food sales (representing general merchandise, clothing and electricals (excluding health and beauty and household products)) continued to grow in the 52 weeks ended February 26, 2011 (increasing by 8.8% compared to the 52 weeks ended February 27, 2010 to £10.3 billion) despite the challenges of weak demand in some of our important markets, with non-food sales representing 15.2% of our sales. In the 26 weeks ended August 27, 2011, non-food sales increased by 2.8% at constant exchange rates compared to the 26 weeks ended August 28, 2010 to £4.8 billion, with strong performances in Europe and Asia being offset by decreased sales in the United Kingdom. We believe our non-food operations will continue to grow based on developing our multi-channel capability, continuing to roll out our Extra format internationally, and investing in our ranges and the customer shopping experience. We will be launching a significant upgrade of our online Direct Shop, featuring additional range and functionality, during the first half of 2012. This will also include the first phase of our "Marketplace", which will enable customers to buy goods from selected sellers on tesco.com.

Tesco Bank performed well in the 52 weeks ended February 26, 2011 (growing profits from £250 million in the 52 weeks ended February 27, 2010 to £264 million in the 52 weeks ended February 26, 2011), driven in part by an increase in fair value releases. This was despite a challenging year in the wider banking sector, and as Tesco Bank continued its transition to full separation from RBS. In the 26 weeks ended August 27, 2011, Tesco Bank experienced growth, with baseline trading profit growing by 24% to £89 million, from £72 million in the 26 weeks ended August 28, 2010. This 24% increase is before all key provisioning movements, and an extra provision for future claims against the mis-selling of PPI through our joint venture with RBS prior to 2008. See "—Results of Operations—26 weeks ended August 27, 2011 compared to 26 weeks ended August 28, 2010—Tesco Bank" for more detail.

Our retailing services business as a whole is continuing to grow based on the success of our online businesses (including grocery online and Tesco Direct), and our telecommunications services operations especially in Tesco Mobile and dunnhumby. Tesco Direct sales continued to grow by 29% in the 52 weeks ended February 26, 2011 compared to the 52 weeks ended February 27, 2010 and by a further 12% in the 26 weeks ended August 27, 2011 compared to the 26 weeks ended August 28, 2010. Our telecommunications services saw strong growth in customer numbers, driven by a 24% rise in Tesco Mobile subscribers. Profitability was impacted in the short term in the 52 weeks ended February 26, 2011 by the costs of investing in the expansion of our Phone Shop network and handset subsidies as we grow our contract business.

Although much of our business is in the United Kingdom, our revenues and sales figures can be affected by exchange rate fluctuations. Consequently, we present changes in revenues and sales at actual and constant exchange rates to isolate the impact of exchange rate fluctuations. Results translated at actual exchange rates describe results translated in accordance with Note 1 to our Audited Consolidated Annual Financial Statements included elsewhere in this document. Results translated at constant exchange rates describe results translated at the exchange rates applied to the prior year or period's (as applicable) results, without regard to any changes in actual exchange rates between the years or periods (as applicable). For more information regarding our foreign exchange risk and our approach for hedging such risk, see "Quantitative and Qualitative Disclosure about Credit and Market Risks—Foreign exchange risk."

There are a number of contingent liabilities that arise in the normal course of our business which, if realized, are not expected to result in any material liability. We recognize provisions for liabilities when it is more likely than not that a settlement will be required and the value of such a payment can be reliably estimated.

Trading Profit and Underlying Profit Before Tax

Trading profit and underlying profit before tax are adjusted measures used by management to internally measure and analyze performance.

Underlying profit before tax is defined as profit before taxation for the year or period (as applicable) from continuing operations, excluding fair value re-measurements of financial instruments, non-cash charges, goodwill impairments and restructuring costs.

Trading profit is operating profit before goodwill impairment and restructuring charges, profit arising on property-related items, the impact on leases of annual uplifts in rent and rent-free periods, intangible asset amortization charges, costs arising from acquisitions, adjustments for the fair value of customer loyalty awards and the IAS 19 pension charge (replacing it with the "normal" cash contributions for pensions).

Neither trading profit nor underlying profit before tax from continuing operations is defined by IFRS, and their presentation is not made in accordance with, IFRS. They are not a measure of financial condition, liquidity or profitability and should not be considered as an alternative to net income determined in accordance with IFRS or operating cash flows determined in accordance with IFRS. We believe that inclusion of trading profit and underlying profit before tax from continuing operations in this document is appropriate to provide additional information to investors about our operating performance and to provide a measure of operating results unaffected by volatility of accounting for financial instruments and other significant items. Because not all companies calculate or present underlying profit before tax from continuing operations identically, this presentation of underlying profit before tax from continuing operations may not be comparable to other similarly titled measures of other companies. For a reconciliation of operating profit to trading profit and profit before tax to underlying profit before tax, see "Selected Financial Information—Reconciliation of Operating Profit to Trading Profit" and "Selected Financial Information—Reconciliation of Underlying Profit Before Tax from Continuing Operations to Profit Before Tax".

Results of Operations

26 weeks ended August 27, 2011 compared to 26 weeks ended August 28, 2010

Revenues

Our revenues increased by 7.8% at actual exchange rates to £31.8 billion in the 26 weeks ended August 27, 2011 from £29.5 billion in the 26 weeks ended August 28, 2010 and by 7.2% at constant exchange rates. Our sales increased by 8.8% at actual exchange rates to £35.5 billion in the 26 weeks ended August 27, 2011 from £32.7 billion in the 26 weeks ended August 28, 2010 and by 8.2% at constant exchange rates. These increases in revenues and sales were due to a solid sales performance in the United Kingdom and significant growth in our international businesses.

Trading conditions in the UK were difficult throughout the 26 weeks ended August 27, 2011, due in part to the continuing adverse impact of high petrol prices on customers' discretionary spending. Despite this, our UK segment delivered a solid performance. Like-for-like sales were weak in the UK, which experienced subdued market demand in non-food categories, especially electronics and entertainment, which are two of our largest product groups. While our performance in food was substantially better, and positive in like-for-like terms, our overall like-for-like growth was slower than expected. Nevertheless, combined with a strong contribution from net new space, our total sales growth in the United Kingdom was faster than the market as a whole.

Our International businesses delivered strong growth in sales in the 26 weeks ended August 27, 2011. There is currently a wide variation in the general economic and consumer environment across our geographies, with the markets hit hardest during the global recession and by subsequent severe austerity measures – such as Ireland and Hungary – still struggling to recover, while others such as Thailand are rebounding strongly. In general, we have achieved good progress against a background of weaker

consumer confidence in most of our International markets, even those in which economic growth remains robust.

Our businesses in Asia delivered double-digit increases in sales, supported by good like-for-like sales growth and a strong contribution from new stores.

Sales growth in Europe inevitably varied across the region given the sharply contrasting economic backgrounds experienced across our European markets during the 26 weeks ended August 27, 2011. Our performance across Central Europe was generally positive in sales terms, and was particularly good in the Czech Republic and Slovakia.

Fresh & Easy in the United States delivered strong sales growth, with higher sales densities in new stores and double digit like-for-like sales growth, as the further changes we have made to the stores as we adapt the offer better to the needs of local customers were well received.

Tesco Bank delivered strong revenue growth, particularly in interest receivable. Bad debt levels continued to fall during the 26 weeks ended August 27, 2011, despite double-digit growth in our personal loan balances, and remained below the industry average. There was strong growth in customer numbers, as well as customer retention rates, particularly on insurance products.

The following table breaks down our revenues by business segment in the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010.

	26 weeksendedAugust 27,2011	26 weeksendedAugust 28,2010–––––––––	Percentageincrease/(decrease)
	–––––––––	–––––––––(£m, except %)
Business segment:		(unaudited)
United Kingdom	20,878	19,739	5.8%
Asia	5,207	4,666	11.6%
Europe	4,905	4,387	11.8%
United States	300	244	23.0%
Tesco Bank	522–––––––––	474–––––––––	10.1%
Total statutory revenues	31,812–––––––––	29,510–––––––––	7.8%

Profitability

Group trading profit increased by 3.7% to £1,773 million in the 26 weeks ended August 27, 2011, from £1,710 million in the 26 weeks ended August 28, 2010. This was after a £57 million increase to £92 million in provisions in Tesco Bank relating to PPI. Excluding this increase in the PPI provision, Group trading profit increased by 7.0%. Group trading margin was 5.5%, representing a decrease of 22 basis points after the impact of the increase in PPI provision and sales tax in Hungary.

Our administrative expenses consist mainly of head-office employee-related costs (such as wages, social security costs and retirement plan costs), and overheads (such as rent, depreciation and utilities). As a percentage of revenues, administrative expenses were relatively steady at 2.5% in the 26 weeks ended August 27, 2011, compared to 2.6% in the 26 weeks ended August 28, 2010.

We also track separately the amount of profit that arises from property-related items, which reflects cash released from property through a sequence of sale-leaseback and other transactions. In the 26 weeks

ended August 27, 2011, profit arising on property-related items decreased by 6.1% to £245 million from £261 million in the 26 weeks ended August 28, 2010. See "Off-balance sheet arrangements —Operating lease commitments".

Underlying profit before tax rose to £1,922 million in the 26 weeks ended August 27, 2011, an increase of 6.2% from £1,810 million in the 26 weeks ended August 28, 2010. Before the additional PPI provision and sales tax in Hungary, underlying profit before tax rose by 10.4% to £1,999 million in the 26 weeks ended August 27, 2011, from £1,810 million in the 26 weeks ended August 28, 2010. On a statutory basis, Group operating profit in the same period rose by 5.9% to £1,937 million, and group profit before tax increased 12.1% to £1,881 million.

Our trading profit increased by 3.7% to £1.8 billion in the 26 weeks ended August 27, 2011 from £1.7 billion in the 26 weeks ended August 28, 2010. Partially offsetting the magnitude of this increase was a £57 million increase in provisions in Tesco Bank relating to payment protection insurance. Excluding the effects of these increased provisions, our trading profit increased by 7.0%.

As a consequence of the decision to seek the sale of our business in Japan, the results of our operations in Japan, including a small first half trading loss (£15 million) before store impairment (£29 million) and the impact of restructuring costs (£5 million), were classified as discontinued operations in the results for the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010. See "— Reclassification of Certain Financial Information" above.

United Kingdom

UK revenues increased by 5.8% to £20.9 billion in the 26 weeks ended August 27, 2011 from £19.7 billion in the 26 weeks ended August 28, 2010. UK sales increased by 7.1% to £23.4 billion in the 26 weeks ended August 27, 2011 from £21.9 billion in the 26 weeks ended August 28, 2010. Excluding petrol and VAT, like-for-like sales decreased by 0.5% in the 26 weeks ended August 27, 2011. With the impact of net new space contributing 3.9% to our sales growth (excluding petrol and VAT) and more than offsetting the decrease in like-for-like sales growth, total sales (excluding petrol and VAT) increased by 3.4% in the 26 weeks ended August 27, 2011. Like-for-like sales (excluding petrol and VAT) decreased by 0.5% in the 26 weeks ended August 27, 2011 primarily as a result of subdued market demand in non-food categories, especially electronics and entertainment. UK trading profit increased by 4.5% (6.2% before the rental and depreciation effects of sale and leaseback transactions) to £1.3 billion in the 26 weeks ended August 27, 2011 from £1.2 billion in the 26 weeks ended August 28, 2010. Trading margin remained relatively stable at 6.01% in the 26 weeks ended August 27, 2011, compared to 6.08% in the 26 weeks ended August 28, 2010.

The following table sets forth the sales, revenue (excluding VAT and impact of IFRIC 13), trading profit and trading margin for our UK business segment in the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010.

	26 weeksendedAugust 27,2011–––––––––	26 weeksendedAugust 28,2010–––––––––	Percentageincrease/decrease–––––––––
	(£m, except %)(unaudited)
United Kingdom:
Sales	23,429	21,870	7.1%
Revenue (excluding VAT and impact of IFRIC 13)	21,196	20,038	5.8%
Trading profitTrading margin*	1,2736.01%	1,2186.08%	4.5%(7)bp

* Trading margin is based on revenue (excluding VAT and impact of IFRIC 13).

Asia

Asia revenues increased by 11.6% at actual exchange rates to £5.2 billion in the 26 weeks ended August 27, 2011 from £4.7 billion in the 26 weeks ended August 28, 2010 and by 11.8% at constant exchange rates. Asia sales increased by 11.7% at actual exchange rates to £5.6 billion in the 26 weeks ended August 27, 2011 from £5.0 billion in the 26 weeks ended August 28, 2010 and by 11.9% at constant exchange rates. Like-for-like sales increased by 3.8% in the 26 weeks ended August 27, 2011, with net new space contributing the remaining 7.9%. Asia trading profit increased by 18.7% at actual exchange rates to £292 million in the 26 weeks ended August 27, 2011 from £246 million in the 26 weeks ended August 28, 2010 and by 18.3% at constant exchange rates. Trading margin increased as well, to 5.59% in the 26 weeks ended August 27, 2011, compared to 5.26% in the 26 weeks ended August 28, 2010.

In the 26 weeks ended August 27, 2011, we approved a plan to sell our operations in Japan. Consequently, we have classified its results as a discontinued operation in our Unaudited Consolidated Interim Financial Statements in our income statement for the weeks ended August 27, 2011 and, for comparative purposes, the 26 weeks ended August 28, 2010. See "—Reclassification of Certain Financial Information" above.

The double-digit increases in sales and trading profit were due to the addition of new store space and strong like-for-like sales growth (in particular in China and Thailand). In China, like-for-like sales increased by 6.2%, compared to the 26 weeks ended August 28, 2010, and we opened four hypermarkets and plan to open 17 more hypermarkets before the end of the financial year. In Thailand, we saw overall strong growth, helped by the promising results of our first Extra format store in Asia, as well as a program of new store openings.

The following table sets forth the sales, revenue (excluding VAT and impact of IFRIC 13), trading profit and trading margin, at actual and constant exchange rates, for our Asia business segment in the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010.

	26 weeksendedAugust 27,2011–––––––––	26 weeksendedAugust 28,2010–––––––––	Percentageincrease/(decrease)at actualexchangerates–––––––––	Percentageincrease/(decrease)at constantexchangerates–––––––––
			(£m, except %)(unaudited)
Asia:
Sales	5,602	5,017	11.7%	11.9%
Revenue (excluding VAT and impact of IFRIC 13)	5,223	4,679	11.6%	11.8%
Trading profit	292	246	18.7%	18.3%
Trading margin*	5.59%	5.26%	33bp	30bp

* Trading margin is based on revenue (excluding VAT and impact of IFRIC 13).

Europe

Europe revenues increased by 11.8% at actual exchange rates to £4.9 billion in the 26 weeks ended August 27, 2011 from £4.4 billion in the 26 weeks ended August 28, 2010 and by 7.4% at constant exchange rates. Europe sales rose by 12.4% at actual exchange rates to £5.7 billion in the 26 weeks ended August 27, 2011 from £5.0 billion in the 26 weeks ended August 28, 2010 and by 7.8% at constant exchange rates. Trading profit increased by 11.8% at actual exchange rates to £237 million in the 26 weeks ended August 27, 2011 from £212 million in the 26 weeks ended August 28, 2010 and by 7.1% at constant exchange rates. Trading profit growth would have been significantly greater at 21.2% but for the sales tax charge in Hungary that was introduced as part of its austerity measures. Trading margins were stable at 4.81% in the 26 weeks ended August 27, 2011, compared to 4.82% in the 26 weeks ended August 28, 2010.

These increases were due to the impact of net new space (reflecting the opening of new stores and the acquisition of existing stores throughout Central Europe) and our strong performance in Central Europe (in particular, the Czech Republic and Slovakia). Clothing sales in Central Europe increased by 11% at constant exchange rates. Like-for-like sales in the Republic of Ireland weakened, and overall growth was constrained by the enduring economic challenges and related austerity measures introduced in the Republic of Ireland and Hungary.

The following table sets forth the sales, revenue (excluding VAT and impact of IFRIC 13), trading profit and trading margin, at actual and constant exchange rates, for our Europe business segment in the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010.

	26 weeksendedAugust 27,2011–––––––––	26 weeksendedAugust 28,2010–––––––––	Percentageincrease/(decrease)at actualexchangerates–––––––––	Percentageincrease/(decrease)at constantexchangerates–––––––––
			(£m, except %)(unaudited)
Europe:
Sales	5,673	5,048	12.4%	7.8%
Revenue (excluding VAT and impact of IFRIC 13)	4,927	4,399	12.0%	7.5%
Trading profit	237	212	11.8%	7.1%
Trading margin*	4.81%	4.82%	(1)bp	(2)bp

* Trading margin is based on revenue (excluding VAT and impact of IFRIC 13).

United States

US revenues increased by 23.0% at actual exchange rates to £300 million in the 26 weeks ended August 27, 2011 from £244 million in the 26 weeks ended August 28, 2010 and by 32.0% at constant exchange rates. US sales increased by 23.1% at actual exchange rates to £304 million in the 26 weeks ended August 27, 2011 from £247 million in the 26 weeks ended August 28, 2010 and by 32.0% at constant exchange rates. US trading losses decreased by 23.2% at actual exchange rates to £73 million in the 26 weeks ended August 27, 2011 from £95 million in the 26 weeks ended August 28, 2010 and by 16.8% at constant exchange rates.

Fresh & Easy reduced its losses significantly during the 26 weeks ended August 27, 2011, delivering a reduction of 23.2% compared to the 26 weeks ended August 28, 2010, which we expect to continue in the 2011/2012 financial year. The reduction in losses has been driven by strong, sustained sales growth, substantial improvements to operating ratios in established stores, higher sales densities in new stores and improving supply chain efficiencies, particularly in our manufacturing facilities.

The following table sets forth the sales, revenue (excluding VAT and impact of IFRIC 13), trading profit and trading margin, at actual and constant exchange rates, for our US business segment in the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010.

	26 weeksendedAugust 27,2011–––––––––	26 weeksendedAugust 28,2010–––––––––	Percentageincrease/(decrease)at actualexchangerates–––––––––	Percentageincrease/(decrease)at constantexchangerates–––––––––
			(£m, except %)(unaudited)
United States:
Sales	304	247	23.1%	32.0%
Revenue (excluding VAT and impact of IFRIC 13)	300	244	23.0%	32.0%
Trading loss	(73)	(95)	(23.2)%	(16.8)%

Tesco Bank

Tesco Bank revenues increased by 10.1% to £522 million in the 26 weeks ended August 27, 2011 from £474 million in the 26 weeks ended August 28, 2010. Tesco Bank trading profit decreased by 65.9% to £44 million in the 26 weeks ended August 27, 2011 from £129 million in the 26 weeks ended August 28, 2010. Excluding the £57 million increase in provisions in Tesco Bank relating to PPI, trading profit decreased by 21.7%. The decrease in trading profit was primarily driven by a reduction in fair value releases.

Tesco Bank's net income increased by 9% in the 26 weeks ended August 27, 2011, excluding the additional PPI provision, and baseline trading profit (before all provisioning movements, including PPI, and before fair value) increased by 24% to £89 million in the same period.

Prior to the release of the Unaudited Consolidated Interim Financial Statements, we carefully reviewed the level of provisioning which is appropriate to cover possible future claims against Tesco arising from alleged mis-selling of PPI policies through our joint venture with RBS prior to 2008. While the level of claims to date was £16 million, as a result of this review, we decided to increase our current provision, which was originally set up in 2009, by a further £57 million to £92 million. This extra provision was made in Tesco Bank's income statement for the 26 weeks ended August 27, 2011.

Customer account numbers grew across the product portfolio during the 26 weeks ended August 27, 2011 compared with the 26 weeks ended August 28, 2010; savings by 1%, active credit card users by 4% and motor insurance by 3%. Balances increased by 3% on credit cards and 2% on savings during the same period. Year-on-year, ATM transactions also increased, by 8%. Tesco credit card retail spend increased by 14.2%. Our new platforms have enabled some significant customer service improvements – for example, instant decisions are now available on loan applications and customers can now open and fund their savings account in ten minutes (this previously took approximately two weeks).

The following table sets forth the revenue (excluding VAT and impact of IFRIC 13) and trading profit (including and excluding the PPI provision increase) for our Tesco Bank business segment in the 26 weeks ended August 27, 2011 and the 26 weeks ended August 28, 2010.

26 weeksendedAugust 27,2011	26 weeksendedAugust 28,2010	Percentageincrease/(decrease)–––––––––
(£m, except %)(unaudited)
		10.1%
		(65.9)%
101	129	(21.7)%
	–––––––––52244	–––––––––474129

52 weeks ended February 26, 2011 compared to 52 weeks ended February 27, 2010

Revenues

Our revenues increased by 7.1% at actual exchange rates to £60.9 billion in the 52 weeks ended February 26, 2011 from £56.9 billion in the 52 weeks ended February 27, 2010 and by 5.6% at constant exchange rates. Our sales increased by 8.1% at actual exchange rates to £67.6 billion in the 52 weeks ended February 26, 2011 from £62.5 billion in the 52 weeks ended February 27, 2010 and by 6.6% at constant exchange rates. These increases in revenues and sales were due to solid sales performance in the United Kingdom and significant growth in our International businesses, driven by steady economic improvement and in certain cases – particularly Asia – sharp improvements in general economic conditions.

The following table breaks down our revenues by business segment in the 52 weeks ended February 26, 2011 and the 52 weeks ended February 27, 2010:

	52 weeksendedFebruary26, 2011	52 weeksendedFebruary27, 2010–––––––––	Percentageincrease/(decrease)
	–––––––––	(£m, except %)	–––––––––
Business segment:
United Kingdom	40,117	38,558	4.0%
Europe	9,159	8,704	5.2%
Asia	10,241	8,439	21.4%
United States	495	349	41.8%
Tesco Bank	919	860	6.9%
Total statutory revenues	–––––––––60,931	–––––––––56,910	7.1%
	–––––––––	–––––––––

Profitability

Group trading profit in the 52 weeks ended February 26, 2011 was £3,679 million, representing an increase of 7.8% from the 52 weeks ended February 27, 2010, and Group trading margin remained stable at 6.0% compared to the 52 weeks ended February 27, 2010.

Underlying profit before tax rose to £3,813 million in the 52 weeks ended February 26, 2011, representing an increase of 12.3% from the 52 weeks ended February 27, 2010. Before property,

underlying profit before tax grew by 12.2% during the same period. On a statutory basis, Group operating profit rose by 10.2% during the same period to £3,811 million, and Group profit before tax increased 11.3% to £3,535 million.

As a percentage of revenues, administrative expenses were relatively steady at 2.8% in the 52 weeks ended February 26, 2011, compared to 2.7% in the 52 weeks ended February 27, 2010.

In the 52 weeks ended February 26, 2011, profit arising on property-related items increased by 13.3% to £427 million from £377 million in the 52 weeks ended February 27, 2010. See "Off-balance sheet arrangements —Operating lease commitments".

United Kingdom

UK revenues increased by 4.0% to £40.1 billion in the 52 weeks ended February 26, 2011 from £38.6 billion in the 52 weeks ended February 27, 2010. UK sales increased by 5.5% to £44.6 billion in the 52 weeks ended February 26, 2011 from £42.3 billion in the 52 weeks ended February 27, 2010, with likefor-like growth of 2.4% and net new space contributing the remaining 3.1%. Excluding petrol and VAT, like-for-like sales growth was nil in the 52 weeks ended February 26, 2011 due to a period of unusually subdued industry growth, linked to the impact of high petrol prices on customers' discretionary spending in our stores, which was offset by the performance of new stores.

UK trading profit increased by 3.8% to £2.5 billion in the 52 weeks ended February 26, 2011 from £2.4 billion in the 52 weeks ended February 27, 2010, or by 6.4% before the effect of our sale and leaseback program, principally the extra rents incurred. Trading margins decreased marginally to 6.14% in the 52 weeks ended February 26, 2011, compared to 6.17% in the 52 weeks ended February 27, 2010.

The following table sets forth the sales, revenue (excluding VAT and impact of IFRIC 13), trading profit and trading margin for our UK business segment in the 52 weeks ended February 26, 2011 and the 52 weeks ended February 27, 2010.

	52 weeksendedFebruary26, 2011	52 weeksendedFebruary27, 2010–––––––––	Percentageincrease/(decrease)
	–––––––––	–––––––––(£m, except %)
United Kingdom:
Sales	44,571	42,254	5.5%
Revenue (excluding VAT and impact of IFRIC 13)	40,766	39,104	4.3%
Trading profit	2,504	2,413	3.8%
Trading margin*	6.14%	6.17%	(3)bp

* Trading margin is based on revenue (excluding VAT and impact of IFRIC 13).

Asia

Asia revenues increased by 21.4% at actual exchange rates to £10.2 billion in the 52 weeks ended February 26, 2011 from £8.4 billion in the 52 weeks ended February 27, 2010 and by 9.5% at constant exchange rates. Asia sales increased by 21.5% at actual exchange rates to £11.0 billion in the 52 weeks ended February 26, 2011 from £9.1 billion in the 52 weeks ended February 27, 2010 and by 9.7% at constant exchange rates. Asia trading profit increased by 29.5% at actual exchange rates to £570 million in the 52 weeks ended February 26, 2011 from £440 million in the 52 weeks ended February 27, 2010 and

by 17.5% at constant exchange rates. Trading margins increased to 5.55% in the 52 weeks ended February 26, 2011, compared to 5.20% in the 52 weeks ended February 27, 2010.

The increases in Asia sales and profits were attributable to like-for-like sales growth, contributions from new stores and our acquisition of Homever in Korea in 2008.

Asia sales grew in the 52 weeks ended February 26, 2011 compared to the 52 weeks ended February 27, 2010, except for Japan, where general economic as well as industry trading conditions remained difficult. Our performance in Asia benefited from favorable exchange rate movements, but even at constant currency our profits grew by 18% compared to the 52 weeks ended February 27, 2010. This increase was driven primarily by improved profitability in Thailand, South Korea and Malaysia. China did not break-even during the 26 weeks ended February 26, 2011, which was a consequence of slower consumer demand growth and our store roll-out program being slower than planned.

Sales of general merchandise in our Asian businesses, which are predominantly hypermarket operations, increased in the 52 weeks ended February 26, 2011. Both hardline and softline sales growth was high-single digit, despite unseasonably warm weather during the third quarter of 2010/11 in China and Korea, which affected clothing sales. Sales in electrical products also increased during the period, particularly in Thailand and China.

The following table sets forth the sales, revenue (excluding VAT and impact of IFRIC 13), trading profit and trading margin, at actual and constant exchange rates, for our Asia business segment in the 52 weeks ended February 26, 2011 and the 52 weeks ended February 27, 2010.

	52 weeksendedFebruary26, 2011–––––––––	52 weeksendedFebruary27, 2010–––––––––	Percentageincrease/(decrease)at actualexchangerates–––––––––	Percentageincrease/(decrease)at constantexchangerates–––––––––
			(£m, except %)
Asia:
Sales	11,023	9,072	21.5%	9.7%
Revenue (excluding VAT and impact of IFRIC 13)	10,278	8,465	21.4%	9.6%
Trading profit	570	440	29.5%	17.5%
Trading margin*	5.55%	5.20%	35bp	34bp

* Trading margin is based on revenue (excluding VAT and impact of IFRIC 13).

Europe

Europe revenues increased by 5.2% at actual exchange rates to £9.2 billion in the 52 weeks ended February 26, 2011 from £8.7 billion in the 52 weeks ended February 27, 2010 and by 7.0% at constant exchange rates. Europe sales rose by 5.6% to £10.6 billion from £10.0 billion in the 52 weeks ended February 27, 2010 and by 7.4% at constant exchange rates. Trading profit increased by 11.2% at actual exchange rates to £527 million in the 52 weeks ended February 26, 2011 from £474 million in the 52 weeks ended February 27, 2010 and by 13.7% at constant exchange rates. Trading margins increased to 5.73% in the 52 weeks ended February 26, 2011, compared to 5.43% in the 52 weeks ended February 27, 2010.

The significant growth in European sales, profits and margins was attributable in part to recovering economies generally and the improvement in the competitiveness of our local businesses as a result of the lower prices offered, promotions and the Clubcard customer loyalty scheme. In Ireland and Hungary,

economic conditions and consumer confidence remained subdued during the period, but despite this, our businesses there delivered a solid performance.

Sales growth varied across the region but like-for-like sales growth in each of the countries in which we operate increased sharply compared with the 52 weeks ended February 27, 2010 in addition to an increase in sales due to new space. Sales and profit in Central Europe was strong during the period and particularly good in the Czech Republic and Slovakia. In Ireland, like-for-like growth during the period was 3.9% in the 52 weeks ended February 26, 2011 compared to the 52 weeks ended February 27, 2010.

General Merchandise, Clothing & Electrical sales were strong, reflecting an overall improving consumer background. Clothing sales, which are a substantial element of our sales mix, increased by 9% at constant exchange rates in Central Europe.

The following table sets forth the sales, revenue (excluding VAT and impact of IFRIC 13), trading profit and trading margin, at actual and constant exchange rates, for our Europe business segment in the 52 weeks ended February 26, 2011 and the 52 weeks ended February 27, 2010.

	52 weeksendedFebruary26, 2011–––––––––	52 weeksendedFebruary27, 2010–––––––––	Percentageincrease/(decrease)at actualexchangerates–––––––––	Percentageincrease/(decrease)at constantexchangerates–––––––––
			(£m, except %)
Europe:
Sales	10,558	9,997	5.6%	7.4%
Revenue (excluding VAT and impact of IFRIC 13)	9,192	8,724	5.4%	7.1%
Trading profit	527	474	11.2%	13.7%
Trading margin*	5.73%	5.43%	30bp	42bp

* Trading margin is based on revenue (excluding VAT and impact of IFRIC 13).

United States

US revenues increased by 41.8% at actual exchange rates to £495 million in the 52 weeks ended February 26, 2011 from £349 million in the 52 weeks ended February 27, 2010 and by 38.1% at constant exchange rates. US sales increased by 41.8% at actual exchange rates to £502 million in the 52 weeks ended February 26, 2011 from £354 million in the 52 weeks ended February 27, 2010 and by 38.1% at constant exchange rates. US trading losses increased by 12.7% at actual exchange rates to £186 million in the 52 weeks ended February 26, 2011 from £165 million in the 52 weeks ended February 27, 2010 and by 9.7% at constant exchange rates.

The increase in trading losses in the 52 weeks ended February 26, 2011 was attributable to the oneoff initial costs of integrating our acquisitions of two fresh food suppliers, 2 Sisters and Wild Rocket Foods, with Fresh & Easy, and exchange rate movements. These businesses have now been fully integrated with our existing kitchen operations, with substantially improved financial performance, product quality and service levels.

The following table sets forth the sales, revenue (excluding VAT and impact of IFRIC 13), trading profit and trading margin, at actual and constant exchange rates, for our US business segment in the 52 weeks ended February 26, 2011 and the 52 weeks ended February 27, 2010.

			Percentageincrease/	Percentageincrease/
	52 weeksended	52 weeksended	(decrease)at actual	(decrease)at constant
	February26, 2011–––––––––	February27, 2010–––––––––	exchangerates–––––––––	exchangerates–––––––––
			(£m, except %)
United States:
Sales	502	354	41.8%	38.1%
Revenue (excluding VAT and impact of IFRIC 13)	495	349	41.8%	38.1%
Trading loss	(186)	(165)	12.7%	9.7%

Tesco Bank

Tesco Bank revenues increased by 6.9% to £919 million in the 52 weeks ended February 26, 2011 from £860 million in the 52 weeks ended February 27, 2010. Tesco Bank trading profit increased by 5.6% to £264 million in the 52 weeks ended February 26, 2011 from £250 million in the 52 weeks ended February 27, 2010, trading margin decreased to 28.73% in the 52 weeks ended February 26, 2011, compared to 29.07% in the 52 weeks ended February 27, 2010.

Increases in Tesco Bank's revenue and trading profit were attributable to savings and loan growth, improved margins and credit card transaction volumes.

These increases were offset in part by provisions made in the 52 weeks ended February 26, 2011 related to bodily injury claims in our motor insurance business – a trend affecting the whole industry – and the costs of migration of the systems and support from the RBS Group, which previously held the other 50% interest.

The following table sets forth the revenue (excluding VAT and impact of IFRIC 13) and trading profit for our Tesco Bank business segment in the 52 weeks ended February 26, 2011 and the 52 weeks ended February 27, 2010.

	52 weeksendedFebruary26, 2011	52 weeksendedFebruary27, 2010	Percentageincrease/(decrease)–––––––––
	––––––––––––––––––(£m, except %)
Tesco Bank:
Tesco Bank revenue (excluding VAT and impact of IFRIC 13)	919	860	6.9%
Tesco Bank trading profit	264	250	5.6%

52 weeks ended February 27, 2010 compared to 53 weeks ended February 28, 2009

Revenues

Our revenues increased by 5.6% at actual exchange rates to £56.9 billion in the 52 weeks ended February 27, 2010 from £53.9 billion in the 53 weeks ended February 28, 2009 and by 4.9% at constant exchange rates. Our sales increased by 5.2% at actual exchange rates to £62.5 billion in the 52 weeks ended February 27, 2010 from £59.4 billion in the 53 weeks ended February 28, 2009 and by 4.6% at constant exchange rates.

In the 53 weeks ended February 28, 2009, our results were reported on a 53-week period for the UK, Republic of Ireland and the United States and a 52-week period for the rest of the group. Revenue and sales growth in the 52 weeks ended February 27, 2010 would have been 7.1% and 6.8% respectively, on a comparable 52-week basis at actual exchange rates.

A solid performance was delivered within the UK business in competitive market conditions due to the steep decline in inflation during the period. In International our results were resilient in the face of challenging economic conditions, especially in Europe due to increasing unemployment and price deflation. Significant growth was seen in our Tesco Bank segment, reflecting our decision to take full control of Tesco Bank in the 53 weeks ended February 28, 2009.

The following table breaks down our revenues by business segment in the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009.

	52 weeksendedFebruary27, 2010	53 weeksendedFebruary28, 2009–––––––––	Percentageincrease/(decrease)
	–––––––––	–––––––––(£m, except %)
Business segment:
United Kingdom	38,558	37,650	2.4%
Europe	8,704	8,831	(1.4)%
Asia	8,439	7,048	19.7%
United States	349	206	69.4%
Tesco Bank	860	163	427.6%
Total statutory revenues	–––––––––56,910–––––––––	–––––––––53,898–––––––––	–––––––––5.6%

Profitability

On a statutory 52 week basis (compared to the 53-week period included in our results for the 2009 financial year), Group operating profit rose by 9.1% to £3,457 million in the 52 weeks ended February 27, 2010 compared to 2009 and Group profit before tax rose by 8.9% to £3,176 million in the 52 weeks ended February 27, 2010 compared to 2009.

As a percentage of revenues, administrative expenses were relatively steady at 2.7% in the 52 weeks ended February 27, 2010, compared to 2.3% in the 53 weeks ended February 28, 2009.

In the 52 weeks ended February 27, 2010, profit arising on property-related items increased by 59.7% to £377 million from £236 million in the 53 weeks ended February 28, 2009. This increase was primarily due to the completion of property transactions resulting in total proceeds of £1.8 billion and initial yields of between 5.0% and 5.2% for stores.

On a comparable 52 week basis, underlying profit before tax rose to £3.4 billion in the 52 weeks ended February 27, 2010, an increase of 10.1% compared to the 2009 financial year. Group trading profit was £3.4 billion in the 52 weeks ended February 27, 2010, an increase of 12.3% compared to the 2009 financial year on a comparable basis and Group trading margin, at 5.9%, rose 25 basis points compared to the 2009 financial year, also on a comparable basis. These increases were attributable in part to the fact that Tesco Bank was fully consolidated in the 52 weeks ended February 27, 2010 and accounted for as a joint venture for most of the 52 weeks ended February 28, 2009. On a comparable basis, Group operating profit rose by 10.7% to £3.5 billion in the 52 weeks ended February 27, 2010 compared to the 2009 financial year. Group profit before tax increased 10.4% to £3.2 billion in the 52 weeks ended February 27, 2010 on a comparable basis, compared to the 2009 financial year.

United Kingdom

UK revenues increased by 2.4% to £38.6 billion in the 52 weeks ended February 27, 2010 from £37.7 billion in the 53 weeks ended February 28, 2009. UK sales increased by 2.2% to £42.3 billion from £41.4 billion in the 53 weeks ended February 28, 2009. UK trading profit increased by 4.5% to £2.4 billion in the 52 weeks ended February 27, 2010 from £2.3 billion in the 53 weeks ended February 28, 2009. Trading margin increased to 6.17% in the 52 weeks ended February 27, 2010, compared to 6.07% in the 53 weeks ended February 28, 2009.

The solid sales growth of our UK business in the 52 weeks ended February 27, 2010 was driven by strong volume performance, and we reached our target of opening 2 million square feet of new space during the year.

	52 weeksendedFebruary27, 2010	53 weeksendedFebruary28, 2009–––––––––	Percentageincrease/(decrease)
	–––––––––(£m, except %)	–––––––––
United Kingdom:
Sales	42,254	41,357	2.2%
Revenue (excluding VAT and impact of IFRIC 13)	39,104	38,028	2.8%
Trading profit	2,413	2,309	4.5%
Trading margin*	6.17%	6.07	10bp

* Trading margin is based on revenue (excluding VAT and impact of IFRIC 13).

Asia

Asia revenues increased by 19.7% at actual exchange rates to £8.4 billion in the 52 weeks ended February 27, 2010 from £7.0 billion in the 53 weeks ended February 28, 2009 and by 15.3% at constant exchange rates. Asia sales increased by 19.7% at actual exchange rates to £9.1 billion in the 52 weeks ended February 27, 2010 from £7.6 billion in the 53 weeks ended February 28, 2009 and by 15.3% at constant exchange rates. Asia trading profit increased by 23.9% at actual exchange rates to £440 million in the 52 weeks ended February 27, 2010 from £355 million in the 53 weeks ended February 28, 2009 and by 18.9% at constant exchange rates. Trading margin increased to 5.20% in the 52 weeks ended February 27, 2010, compared to 5.02% in the 53 weeks ended February 28, 2009.

Despite challenging economic conditions in Asia, we grew sales and profits driven by new space and the strong performance of the stores acquired in South Korea in 2008, which became profitable in that year.

The following table sets forth the sales, revenue (excluding VAT and impact of IFRIC 13), trading profit and trading margin, at actual and constant exchange rates, for our Asia business segment in the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009.

	52 weeksendedFebruary27, 2010–––––––––	53 weeksendedFebruary28, 2009–––––––––	Percentageincrease/(decrease)at actualexchangerates–––––––––	Percentageincrease/(decrease)at constantexchangerates–––––––––
		(£m, except %)
Asia:
Sales	9,072	7,578	19.7%	15.3%
Revenue (excluding VAT and impact of IFRIC 13)	8,465	7,068	19.8%	15.3%
Trading profit	440	355	23.9%	18.9%
Trading margin*	5.20%	5.02%	18bp	16bp

* Trading margin is based on revenue (excluding VAT and impact of IFRIC 13).

Europe

Europe revenues decreased by 1.4% at actual exchange rates to £8.7 billion in the 52 weeks ended February 27, 2010 from £8.8 billion in the 53 weeks ended February 28, 2009 and by 1.7% at constant exchange rates. Europe sales decreased by 1.2% at actual exchange rates to £10.0 billion in the 52 weeks ended February 27, 2010 from £10.1 billion in the 53 weeks ended February 28, 2009 and by 1.4% at constant exchange rates. Europe trading profit decreased by 4.4% at actual exchange rates to £474 million in the 52 weeks ended February 27, 2010 from £496 million in the 53 weeks ended February 28, 2009 and by 6.0% at constant exchange rates. Trading margin decreased to 5.43% in the 52 weeks ended February 27, 2010, compared to 5.60% in the 53 weeks ended February 28, 2009, primarily due to the downturn and economic environment.

Despite challenging economic conditions in the form of increasing unemployment and price deflation during the period, European sales growth varied across the region with a good contribution from new space helping sales grow in Poland and Turkey and stay stable in Czech Republic and Hungary. Our revenues and trading profit in these regions were also supported by reducing costs and lowering prices for customers in Central Europe and by continuing to invest in new space. Significant price deflation and cross-border shopping driven by rapid movements in exchange rates resulted in sales declining in Slovakia and Ireland.

Trading profit in the region as a whole declined by 4.4% (at actual exchange rates) compared to 2009, but was resilient given the severity of the downturn and economic environment.

The following table sets forth the sales, revenue (excluding VAT and impact of IFRIC 13), trading profit and trading margin, at actual and constant exchange rates, for our Europe business segment in the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009.

	52 weeksendedFebruary27, 2010–––––––––	53 weeksendedFebruary28, 2009–––––––––	Percentageincrease/(decrease)at actualexchangerates–––––––––	Percentageincrease/(decrease)at constantexchangerates–––––––––
			(£m, except %)
Europe:
Sales	9,997	10,120	(1.2)%	(1.4)%
Revenue (excluding VAT and impact of IFRIC 13)	8,724	8,862	(1.6)%	(1.8)%
Trading profit	474	496	(4.4)%	(6.0)%
Trading margin*	5.43%	5.60%	(16)bp	(24)bp

* Trading margin is based on revenue (excluding VAT and impact of IFRIC 13).

United States

US revenues increased by 69.4% at actual exchange rates to £349 million in the 52 weeks ended February 27, 2010 from £206 million in the 53 weeks ended February 28, 2009 and by 54.9% at constant exchange rates. US sales increased by 70.2% at actual exchange rates to £354 million in the 52 weeks ended February 27, 2010 from £208 million in the 53 weeks ended February 28, 2009 and by 55.8% at constant exchange rates. US trading loss increased by 16.2% at actual exchange rates to £165 million in the 52 weeks ended February 27, 2010 from £142 million in the 53 weeks ended February 28, 2009 and by 6.3% at constant exchange rates. Sales growth was driven by the growing number of stores, increased customer awareness of Fresh & Easy and improvements we made in-store. Our trading loss reflects the costs associated with the implementation of an infrastructure in our US segment that is able to support hundreds of stores.

The following table sets forth the sales, revenue (excluding VAT and impact of IFRIC 13), trading profit and trading margin, at actual and constant exchange rates, for our US business segment in the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009.

	52 weeksendedFebruary27, 2010–––––––––	53 weeksendedFebruary28, 2009–––––––––	Percentageincrease/(decrease)at actualexchangerates–––––––––	Percentageincrease/(decrease)at constantexchangerates–––––––––
			(£m, except %)
United States:
Sales	354	208	70.2%	55.8%
Revenue (excluding VAT and impact of IFRIC 13)	349	206	69.4%	54.9%
Trading loss	(165)	(142)	16.2%	6.3%

Tesco Bank

Tesco Bank revenues increased to £860 million in the 52 weeks ended February 27, 2010 from £163 million in the 53 weeks ended February 28, 2009, and Tesco Bank trading profit increased to £250 million in the 52 weeks ended February 27, 2010 from £68 million from the 53 weeks ended February 28, 2009. These increases reflect the full consolidation of Tesco Bank in 2009/10, whereas it had been accounted for as a 50% joint venture for most of 2008/09.

The following table sets forth the revenue (excluding VAT and impact of IFRIC 13) and trading profit for our Tesco Bank business segment in the 52 weeks ended February 27, 2010 and the 53 weeks ended February 28, 2009.

	52 weeksendedFebruary27, 2010	53 weeksendedFebruary28, 2009	Percentageincrease/(decrease)
	–––––––––	–––––––––(£m, except %)	–––––––––
Tesco Bank:
Tesco Bank revenue (excluding VAT and impact of IFRIC 13)	860	163	427.6%
Tesco Bank trading profit	250	68	267.6%

Liquidity and Capital Resources

Funding and liquidity

The Group finances its operations by a combination of retained profits, disposals of property assets, long and medium-term debt, capital market issues, short term commercial paper, bank borrowings and leases. Our objective is to ensure continuity of funding. Our policy is to smooth our debt maturity profile, to arrange funding ahead of requirements and to maintain sufficient undrawn committed bank facilities, and a strong credit rating so that maturing debt may be refinanced as it falls due. We currently have available undrawn committed bank facilities of £2,825 million that expire in more than two years.

Our long-term credit rating remained stable during the year. As of the date of this document, our credit rating was A3 (stable) from Moody's Investors Service, Inc. and A- (stable) from Standard & Poor's, a division of The McGraw-Hill Companies, Inc and A- (stable) from Fitch Ratings Ltd. New funding of £1.7 billion was arranged during the 52 weeks ended February 26, 2011, including a net £1.6 billion from property disposals and £0.1 billion from long term debt. As of February 26, 2011, net debt was £6.8 billion (compared to £7.9 billion as of February 27, 2010) and the average weighted debt maturity was 10.8 years (compared to 11.7 years as of February 27, 2010). As of August 27, 2011, net debt was £7.6 billion (compared to £7.6 billion as of August 28, 2010) and the average weighted debt maturity was 10.8 years (compared to 11.0 years as of August 28, 2010).

Cash flow and balance sheet

Group capital expenditure was £2.1 billion in the 26 weeks ended August 27, 2011 (compared to £1.9 billion in the 26 weeks ended August 28, 2010) and was £3.7 billion in the 52 weeks ended February 26, 2011 (compared to £3.1 billion from the 52 weeks ended February 27, 2010). UK capital expenditure was £1.0 billion in the 26 weeks ended August 27, 2011, (compared to £1.0 billion in the 26 weeks ended August 28, 2010), and was £1.7 billion in the 52 weeks ended February 26, 2011 (compared to £1.5 billion in the 52 weeks ended February 27, 2010). Tesco Bank capital expenditure was £0.1 billion in the 26 weeks ended August 27, 2011 (compared to £0.1 billion in the 26 weeks ended August 28, 2010) and £0.2 billion in the 52 weeks ended February 26, 2011 (compared to £0.1 billion in the 52 weeks ended

February 27, 2010). In both cases such expenditure was used primarily for continued investment in the replatforming of our systems. International capital expenditure was £1.0 billion in the 26 weeks ended August 27, 2011 (compared to £0.8 billion in the 26 weeks ended August 28, 2010), which was composed of £0.6 billion in Asia, £0.3 billion in Europe and £0.1 billion in the United States, and was £1.8 billion in the 52 weeks ended February 26, 2011 (compared to £1.5 billion in the 52 weeks ended February 27, 2010), which was composed of £1.1 billion in Asia, £0.6 billion in Europe and £0.1 billion in the United States. We expect total Group capital expenditure to be around £3.9 billion for the 2012 financial year.

Cash flow from operating activities, including a £222 million decrease in working capital, totaled £2.0 billion in the 26 weeks ended August 27, 2011. Overall, we had a net cash outflow of £475 million from cash and cash equivalents during the 26 weeks ended August 27, 2011. Net debt as of August 27, 2011 was £7.6 billion, compared to £7.6 billion on August 28, 2010. Gearing (net debt over total equity) was 45% at August 27, 2011, compared to 52% on August 28, 2010. Cash flow from operating activities, including a £202 million (or £217 million when accounting for the discontinuation of operations in Japan) increase in working capital, totaled £4.0 billion in the 52 weeks ended February 26, 2011. Overall, we had a net cash outflow of £903 million (or £908 million when accounting for the discontinuation of operations in Japan) during the 52 weeks ended February 26, 2011. Net debt as of February 26, 2011 was £6.8 billion, compared to £7.9 billion as of February 27, 2010. Gearing was 41% as of February 26, 2011 and 54% as of February 27, 2010.

Return on capital employed

We are committed to increasing our post-tax return on capital employed ("ROCE"). Our ROCE increased substantially in the 52 weeks ended February 26, 2011 to 12.9% (compared to 12.1% in the 52 weeks ended February 27, 2010). This increase was driven by operational improvements in the form of strong profit growth, improved working capital and greater capital efficiency as a result of our sale and leaseback program.

Finance costs and tax

Net finance costs were £97 million in the 26 weeks ended August 27, 2011 (compared to £164 million in the 26 weeks ended August 28, 2010), giving interest cover (based on earnings before interest and tax ("EBIT")) of 20.4 times (compared to 11.2 times in the 26 weeks ended August 28, 2010). In the 26 weeks ended August 27, 2011, total Group tax was charged at an effective rate of 23.0% (compared to 24.3% the 26 weeks ended August 28, 2010). This reduction in the tax rate is primarily due to the lowering of the rate of UK corporate tax from 27% to 26%, effective on April 1, 2011. Net finance costs were £333 million in the 52 weeks ended February 26, 2011 (compared to £314 million in the 52 weeks ended February 27, 2010 and £362 million in the 53 weeks ended February 28, 2009), giving interest cover of 11.6 times (compared to 11.1 times in the 52 weeks ended February 27, 2010 and 9.1 times in the 53 weeks ended February 28, 2009). In the 52 weeks ended February 26, 2011, total Group tax was charged at an effective rate of 24.4% (compared to 26.4% in the 52 weeks ended February 27, 2010 and 26.7% in the 53 weeks ended February 28, 2009).

Certain contractual obligations

The tables below show, prior to the issuance of the notes offered hereby and the application of the proceeds thereof as described in "Use of Proceeds", as of February 26, 2011 and August 27, 2011, our contractual obligations, excluding purchase commitments in the ordinary course of business, employment agreements, interest on debt obligations, operating lease commitments (in the case of August 27, 2011) and capital commitments. For details of capital commitments, please refer to "—Off balance sheet arrangements—Commitments and Contingencies—Capital Commitments".

The table as of February 26, 2011 is based on our audited consolidated financial statements as of February 26, 2011. The table as of August 27, 2011 is based on our unaudited condensed consolidated financial statements as of August 27, 2011.

As of February 26, 2011	Payment Due by Period–––––––––––––––––––––––––––––––
	Total–––––––––	Less than1 year–––––––––	More than1 year–––––––––
		(£m)
Trade and other payables	10,484	10,303	181
Borrowings(1) (including finance leases)	11,075–––––––––	1,386–––––––––	9,689–––––––––
Contractual obligations recorded as liabilities as of February 26,
2011	21,559–––––––––	11,689–––––––––	9,870–––––––––
Future minimum rentals payable under non-cancelable operating
leases	16,015–––––––––	1,138–––––––––	14,877–––––––––

(1) For borrowings, please refer to our audited consolidated financial statements as of February 26, 2011, included elsewhere in this document, for further details of maturity dates.

Payment Due by Period
Total	Less than1 year	More than1 year–––––––––
	(£m)
11,177	10,961	216
11,470	1,321	10,149–––––––––

22,647	12,282	10,365–––––––––
	–––––––––––––––––––––––––––	––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Off-balance sheet arrangements

Commitments and Contingencies

Capital commitments

As of August 27, 2011, there were commitments for capital expenditure contracted for, but not provided, of £1,694 million, principally relating to the store development program. As of February 26, 2011, there were commitments for capital expenditure contracted for, but not provided, of £1,521 million (compared to £1,835 million as of February 27, 2010), principally relating to the store development program.

Contingent liabilities

The Company has irrevocably guaranteed the liabilities, as defined in section 5(c) of the Republic of Ireland (Amendment Act) 1986, of various subsidiary undertakings incorporated in the Republic of Ireland, primarily related to Tesco Bank's operations in the Republic of Ireland.

Tesco Bank had commitments, as described in its own financial statements as of February 28, 2011, of formal standby facilities, credit lines and other commitments to lend, totaling £7.1 billion (compared to

£6.5 billion as of February 28, 2010). The amount is intended to provide an indication of the volume of business transacted and not of the underlying credit or other risks.

For details of assets held under finance leases, which are pledged as security for the finance lease liabilities, see note 11 to our 2011 Audited Consolidated Annual Financial Statements. We recognize provisions for liabilities when it is more likely than not a settlement will be required and the value of such a payment can be reliably estimated.

There are a number of contingent liabilities that arise in the normal course of business, which if realized, are not expected to result in a material liability to us.

Leasing Commitments

Finance lease commitments

The following table sets forth future minimum lease payments under finance leases and hire purchase contracts, together with the present value of the net minimum lease payments, as of February 26, 2011, February 27, 2010 and February 28, 2009.

	As February 26, 2011			As of February 27, 2010 As of February 28, 2009––––––––––––––––––––––––––––––––––––––––
	Minimumleasepayments–––––––––	PV ofminimumleasepayments–––––––––	Minimumleasepayments–––––––––	PV ofminimumleasepayments–––––––––	Minimumleasepayments–––––––––	PV ofminimumleasepayments–––––––––
			(£m)
Within one year	56	50	49	45	55	47
Greater than one but lessthan five years	81	44	101	90	140	114
After five years	206–––––––––	104–––––––––	178–––––––––	74–––––––––	172–––––––––	82–––––––––
Total minimum leasepayments	343	198–––––––––	328	209–––––––––	367	243–––––––––
Less future finance charges	(145)–––––––––		(119)–––––––––		(124)–––––––––
Present value of minimumlease payments	198–––––––––		209–––––––––		243–––––––––

As a lessee, we have finance leases for various items of plant, equipment, fixtures and fittings. There are also a small number of buildings that are held under finance leases. The fair value of our lease obligations approximate to their carrying value.

Operating lease commitments

The following table sets forth future minimum rentals payable under non-cancellable operating leases as of February 26, 2011, February 27, 2010 and February 28, 2009.

	As ofFebruary26, 2011–––––––––	As ofFebruary27, 2010–––––––––(£m)	As ofFebruary28, 2009
			–––––––––
Within one year	1,138	1,043	754
Greater than one year but less than five years	4,246	3,702	3,069
After five years	10,631	10,004	9,170
Total minimum lease payments	–––––––––16,015–––––––––	–––––––––14,749–––––––––	–––––––––12,993–––––––––

As a lessee, we have operating lease obligations representing rentals payable by us for certain of our retail, distribution and office properties and other assets such as motor vehicles. The leases have varying terms, purchase options, escalation clauses and renewal rights.

We have lease break options on certain sale and leaseback transactions, which are exercisable if an existing option to buy back leased assets at market value at a specified date is also exercised, no commitment has been included in respect of the buy-back option as the option is at the Group's discretion. The Group is not obliged to pay lease rentals after that date, therefore minimum lease payments exclude those falling after the buy-back date.

Since 1988, we have entered into several joint ventures and sold and leased back properties to and from these joint ventures. The terms of these sale and leasebacks vary; however, common factors include: the sale of the properties to the joint venture at market value, options at the end of the lease for us to repurchase the properties at market value, market rent reviews and 20-30 full year lease terms. We review the substance as well as the form of the arrangements when determining the classification of leases as operating or finance; all of the leases under these arrangements are operating leases.

As a lessor, we both rent out our properties and also sublet various leased buildings under operating leases.

See Note 36 to our Audited Consolidated Annual Financial Statements for details of the payments payable or receivable under these operating leases.

Quantitative and Qualitative Disclosure about Credit and Market Risks

In the normal course of business, we are exposed to credit risk and market risk from fluctuations in interest rates and exchange rates. We address this risk through our hedging policies and procedures, which are implemented by our management and directors. We do not enter into any derivative transactions for speculative purposes.

Interest rate risk

Interest rate risk arises from long-term borrowings. Debt issued at variable rates exposes us to cash flow interest rate risk. Debt issued at fixed rates exposes us to fair value risk.

Our objective is to limit our profit and loss downside from rising interest rates. Forward rate agreements, interest rate swaps, caps and floors are used to achieve the desired mix of fixed and floating rate debt.

Our policy is to fix interest rates for the year on a minimum of 40% of our actual and projected debt interest costs, excluding Tesco Bank. As of February 26, 2011, £6.2 billion of debt (compared to £5.6 billion as of February 27, 2010) was at fixed rates of interest. This equates to 91% of total debt as of February 26, 2011 (compared to 72% as of February 27, 2010). The remaining balance of our debt is in floating rate form. The average rate of interest paid on an historic cost basis in the 52 weeks ended February 26, 2011, excluding joint ventures and associates, was 5.4% (compared to 5.4% in the 52 weeks ended February 27, 2010).

In addition, interest rate risk arises where assets and liabilities in Tesco Bank's banking activities have different re-pricing dates. Tesco Bank policy seeks to minimize the sensitivity of net interest income to changes in interest rates. Potential exposures to interest rate movements in the medium to long term are measured and controlled through position and sensitivity limits. Short-term exposures are measured and controlled in terms of net interest income sensitivity over 12 months to a 1% parallel movement in interest rates. Tesco Bank also uses Value at Risk ("VaR") for risk management purposes with a time horizon of one trading day and a confidence interval of 95%. Interest rate risk is managed using interest rate swaps as the main hedging instrument.

Foreign exchange risk

We are exposed to foreign exchange risk principally via:

Transactional exposure, from the cost of future purchases of goods for resale, where those purchases are denominated in a currency other than the functional currency of the purchasing company.
Net investment exposure, from the value of net investments outside the United Kingdom.
Loans to non-UK subsidiaries.

Our principal objective is to reduce the effect of exchange rate volatility on operating margins. Transactional currency exposures that could significantly impact our income statement are managed, typically using forward purchases or sales of foreign currencies and currency options. As of February 26, 2011, forward foreign currency transactions, designated as cash flow hedges, equivalent to £1.615 billion were outstanding (compared to £1.083 billion as of February 27, 2010) as detailed in Note 22 of our audited consolidated financial statements as of and for the years ended February 26, 2011 and February 27, 2010, which are included elsewhere in this document.

Credit risk

Credit risk arises from cash and cash equivalents, trade and other receivables, customer deposits, financial instruments and deposits with banks and financial institutions.

The objective is to reduce the risk of loss arising from default by parties to financial transactions across an approved list of counterparties of good credit quality. For instance, our policy is to enter into derivative contracts only with counterparties rated at least A1 by Moody's. Our positions with these counterparties and their credit ratings are routinely monitored.

Our counterparty exposure under derivative contracts was £1,287 million as of February 26, 2011 (compared to £1,474 million as of February 27, 2010). We consider our maximum credit risk to be £10.9 billion as of February 26, 2011 (compared to £11.0 billion as of February 27, 2010), such amount being our total financial assets.

Tesco Bank retail credit risk is managed through the credit risk policy framework, which is agreed through the Tesco Bank Risk Management committee and defines limits and standards at all stages of the customer lifecycle, including new account sanctioning, customer management and collections and recoveries activity. Customer credit decisions are managed principally through the deployment of bespoke credit scorecard models and credit policy rules which restrict specific areas of lending, and an affordability assessment which determines a customer's ability to repay an outstanding credit amount. Wholesale counterparty credit risk limits are managed in accordance with a control framework, approved by the Tesco Bank Risk Management committee, which sets limits based on counterparty creditworthiness and instrument type. Tesco Bank continues to use Fitch, Moody's and Standard & Poor's ratings as part of the credit assessment process.

Critical Accounting Policies

Use of assumptions and estimates

The preparation of our consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and 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. Revisions to accounting estimates are recognized in accordance with IAS 8 "Accounting policies, Changes in Accounting Estimates and Errors".

Critical estimates and assumptions that are applied in the preparation of the consolidated financial statements include depreciation and amortization; impairment of goodwill; impairment of assets; impairment of loans and advances to customers; provisions; insurance reserves; and post-employment benefit obligations.

Property, plant and equipment

Property, plant and equipment is carried at cost less accumulated depreciation and any recognized impairment in value.

Property, plant and equipment is depreciated on a straight-line basis to its residual value over its anticipated useful economic life.

The following depreciation rates are applied for the Group:

freehold and leasehold buildings with greater than 40 years unexpired at 2.5% of cost;
leasehold properties with less than 40 years unexpired are depreciated by equal annual installments over the unexpired period of the lease; and
plant, equipment, fixtures and fittings and motor vehicles at rates varying from 9% to 50%.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, when shorter, over the term of the relevant lease.

Intangible assets

Acquired intangible assets

Acquired intangible assets, such as software, pharmacy licenses, customer relationships, contracts and brands, are measured initially at cost and are amortized on a straight-line basis over their estimated useful lives, at 2%-100% of cost per annum.

Internally-generated intangible assets – Research and development expenditure

Research costs are expensed as incurred.

Development expenditure incurred on an individual project is capitalized only if all the criteria set out in IAS 38 "Intangible Assets" are met, principally:

an asset is created that can be identified (such as software or new processes);
it is probable that the asset created will generate future economic benefits; and
the development cost of the asset can be measured reliably.

Following the initial recognition of development expenditure, the cost is amortized over the project's estimated useful life, usually at 14%-25% of cost per annum.

Impairment of non-financial assets

Goodwill is reviewed for impairment at least annually by assessing the recoverable amount of each cash-generating unit to which the goodwill relates. The recoverable amount is the higher of fair value less costs to sell, and value in use. When the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized. Any impairment is recognized immediately in the Group Income Statement and is not subsequently reversed.

For all other non-financial assets (including intangible assets and property, plant and equipment) the Group performs impairment testing where there are indicators of impairment. If such an indicator exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). 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 to sell and value in use. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cashgenerating 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 recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately as a credit to the Group Income Statement.

Business combinations and goodwill

The Group accounts for all business combinations by applying the purchase method. All acquisition-related costs are expensed. Prior to the adoption of IFRS 3 (Revised) "Business Combinations" from July 1, 2009, the Group capitalized directly attributable acquisition costs as part of goodwill.

On acquisition, the assets (including intangible assets), liabilities and contingent liabilities of an acquired entity are measured at their fair value. The interest of minority shareholders is stated at the minority's proportion of the fair values of the assets and liabilities recognized.

The Group recognizes intangible assets as part of business combinations at fair value on the date of acquisition. The determination of these fair values is based upon management's judgment and includes assumptions on the timing and amount of future incremental cash flows generated by the assets acquired and the selection of an appropriate cost of capital. The useful lives of intangible assets are estimated and amortization is charged on a straight-line basis.

Goodwill arising on consolidation represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets/net liabilities of the acquired subsidiary, joint venture or associate at the date of acquisition. If the cost of acquisition is less than the fair value of the Group's share of the net assets/net liabilities of the acquired entity (i.e., a discount on acquisition), the difference is credited to the Group Income Statement in the period of acquisition.

At the acquisition date of a subsidiary, goodwill acquired is recognized as an asset and is allocated to each of the 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.

Goodwill arising on acquisitions before February 29, 2004 (the date of transition to IFRS) was retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been restated and will not be included in determining any subsequent profit or loss on disposal.

Post-employment and similar obligations

The Group accounts for pensions and other post-employment benefits (principally private healthcare) under IAS 19 "Employee Benefits".

For defined benefit plans, obligations are measured at discounted present value (using the projected unit credit method) while plan assets are recorded at fair value. The operating and financing costs of such plans are recognized separately in the Group Income Statement; service costs are spread systematically over the expected service lives of employees and financing costs are recognized in the periods in which they arise. Actuarial gains and losses are recognized immediately in the Group Statement of Comprehensive Income.

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

Financial instruments

Financial assets and financial liabilities are recognized on the Group's Balance Sheet when the Group becomes a party to the contractual provisions of the instrument.

Trade receivables

Trade receivables are non interest-bearing and are recognized initially at fair value, and subsequently at amortized cost using the effective interest rate method, less provision for impairment.

Investments

Investments are recognized at trade date. Investments are classified as either held for trading or available-for-sale, and are recognized at fair value. There are no investments classified as held for trading.

For available-for-sale investments, gains and losses arising from changes in fair value are recognized directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognized in equity is included in the net result for the period. Interest calculated using the effective interest rate method is recognized in the Group Income Statement. Dividends on an available-for-sale equity instrument are recognized in the Group Income Statement when the entity's right to receive payment is established.

Loans and advances to customers and banks

Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and include amounts due from customers and amounts due from banks. The Group has no intention of trading these loans and advances and consequently they are not classified as held for trading or designated as fair value through profit and loss. Loans and advances are initially recognized at fair value plus directly related transaction costs. Subsequent to initial recognition, these assets are carried at amortized cost using the effective interest method less any impairment losses. Income from these financial assets is calculated on an effective yield basis and is recognized in the Group Income Statement.

Impairment of loans and advances to customers and banks

At each balance sheet date the Group reviews the carrying amounts of its loans and advances to determine whether there is any indication that those assets have suffered an impairment loss. An impairment loss has been incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.

If there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as loans and advances has been incurred, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets discounted at the effective interest rate of the instrument at initial recognition. Impairment losses are assessed individually for financial assets that are individually significant and collectively for assets that are not individually significant. In making collective assessments of impairment, financial assets are grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios are estimated on the basis of the contractual cash flows and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is adjusted, on the basis of current observable data, to reflect the effects of current conditions not affecting the period of historical experience.

Impairment losses are recognized in the Group Income Statement and the carrying amount of the financial asset or group of financial assets is reduced by establishing an allowance for impairment losses. If in a subsequent period the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognized, the previously recognized loss is reversed by adjusting the allowance. Once an impairment loss has been recognized on a financial asset or group of financial assets, interest income is recognized on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.

significant factors in establishing the provisions are the expected loss rates and the related average life. The portfolios include credit card receivables and other personal advances. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, the unemployment level, payment behavior and bankruptcy trends.

Financial liabilities and equity instruments

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that gives a residual interest in the assets of the Group after deducting all of its liabilities.

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 amortized cost with any difference between cost and redemption value being recognized 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 stated at amortized cost.

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, 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, however, if derivatives do not qualify for hedge accounting they are accounted for as such.

Derivative financial instruments are recognized and stated at fair value. The fair value of derivative financial instruments is determined by reference to market values for similar financial instruments, by discounted cash flows, or by the use of option valuation models. Where derivatives do not qualify for hedge accounting, any gains or losses on re-measurement are immediately recognized 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.

In order to qualify for hedge accounting, the Group is required to document from inception the relationship between the item being hedged and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an ongoing basis. This effectiveness testing is performed at each period end to ensure that the hedge remains highly effective.

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

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 recognized asset or liability. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Group Income Statement, together with any changes in the fair value of the hedged item that is attributable to the hedged risk.

Derivative financial instruments qualifying for fair value hedge accounting are principally interest rate swaps and cross currency swaps.

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 recognized asset or liability, or a highly probable forecasted transaction.

The effective element of any gain or loss from re-measuring the derivative instrument is recognized directly in equity.

The associated cumulative gain or loss is reclassified from the Group Statement of Changes in Equity and recognized in the Group Income Statement in the same period or periods during which the hedged transaction affects the Group Income Statement. The classification of the effective portion when recognized in the Group Income Statement is the same as the classification of the hedged transaction. Any element of the re-measurement of the derivative instrument which does not meet the criteria for an effective hedge is recognized immediately in the Group Income Statement within finance income or costs.

Derivative instruments qualifying for cash flow hedging are principally forward foreign exchange transactions and interest rate swaps.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognized in equity is retained in the Group Statement of Changes in Equity until the forecasted transaction occurs or the original hedged item affects the Group Income Statement. If a forecasted hedged transaction is no longer expected to occur, the net cumulative gain or loss recognized in the Group Statement of Changes in Equity is reclassified to the Group Income Statement.

Net investment hedging

Derivative 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 re-measuring the derivative instrument is recognized directly in the Group Statement of Changes in Equity. Any ineffective element is recognized immediately in the Group Income Statement. Gains and losses accumulated in the Group Statement of Changes in Equity are included in the Group Income Statement when the foreign operation is disposed of.

Derivative instruments designated as net investment hedges are principally forward foreign exchange transactions.

Treatment of agreements to acquire non-controlling interests

The Group has entered into a number of agreements to purchase the remaining shares of subsidiaries with non-controlling interests.

Under IAS 32 "Financial Instruments: presentation", the net present value of the expected future payments are shown as a financial liability. At the end of each period, the valuation of the liability is reassessed with any changes recognized in the Group Income Statement within finance income or costs. Where the liability is in a currency other than pounds Sterling, the liability has been designated as a net investment hedge. Any change in the value of the liability resulting from changes in exchange rates is recognized directly in equity.

Leasing

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.

The Group as a lessor

Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group's net investment in the leases. 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 recognized on a straight-line basis over the term of the lease.

The Group as a lessee

Assets held under finance leases are recognized as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability is included in the Group Balance Sheet as a finance lease obligation. Lease payments are apportioned between finance charges and a reduction of the lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the Group Income Statement.

Rentals payable under operating leases are charged to the Group Income Statement on a straightline basis over the term of the lease.

Sale and leaseback

A sale and leaseback transaction is one where the Group sells an asset and immediately reacquires the use of that asset by entering into a lease with the buyer. The accounting treatment of the sale and leaseback depends upon the substance of the transaction (by applying the lease classification principles described above) and whether or not the sale was made at the asset's fair value.

For sale and finance leasebacks, any profit from the sale is deferred and amortized over the lease term. For sale and operating leasebacks, generally the assets are sold at fair value, and accordingly the profit or loss from the sale is recognized immediately in the Group Income Statement.

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 year, using tax rates enacted or substantively enacted by the balance sheet date. Tax expense is recognized in the Group Income Statement except to the extent that it relates to items recognized in the Group Statement of other Comprehensive Income or directly in the Group Statement of Changes in Equity, in which case it is recognized in the Group Statement of other Comprehensive Income 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 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 equity or other comprehensive income, in which case the deferred tax is also recognized in equity, or other comprehensive income, respectively.

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

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.

Non-current assets held for sale

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through sale rather than continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale and it should be expected to be completed within one year from the date of classification.

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Foreign currencies

Transactions in foreign currencies are translated 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 at the rates prevailing on the balance sheet date. All differences are taken to the Group Income Statement.

The financial statements of foreign subsidiaries are translated into pounds Sterling. Since the majority of consolidated companies operate as independent entities within their local economic environment, their respective local currency is the functional currency. Therefore, assets and liabilities of overseas subsidiaries denominated in foreign currencies are translated at exchange rates prevailing at the date of the Group Balance Sheet; profits and losses are translated at average exchange rates for the relevant accounting periods. Exchange differences arising are recognized in the Group Statement of Comprehensive Income and are included in the Group's translation reserve. Such translation differences are recognized 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.

Revenue

Revenue comprises the fair value of consideration received or receivable for the sale of goods and services in the ordinary course of the Group's activities.

Sale of goods

Revenue is recognized when the significant risks and rewards of ownership of the goods have transferred to the buyer and the amount of revenue can be measured reliably.

Revenue is recorded net of returns, discounts/offers and value added taxes. Offers include: moneyoff coupons, conditional spend vouchers and offers such as buy one get one free (BOGOF) and 3 for 2.

Provision of services

Revenue from the provision of services is recognized when the service is provided and the revenue can be measured reliably, based on the terms of the contract.

Where the Group acts as an agent selling goods or services, only the commission income is included within revenue.

Financial services

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

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.

Fees in respect of services (such as credit card interchange, late payment and balance transfer fees and ATM revenue) are recognized as the right to consideration accrues through the provision of the service to the customer. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable.

The Group generates commission from the sale and service of Motor and Home Insurance policies underwritten by Tesco Underwriting Limited. This is based on pre-determined commission rates at the point of sale. Similar commission income is also generated from the sale of white label insurance products underwritten by other third party providers.

The Group continues to receive insurance commission arising from the sale of insurance policies sold under the Tesco brand through the legacy arrangement with RBS. This commission income is variable and dependent upon the profitability of the underlying insurance policies.

Clubcard, loyalty and other initiatives

The cost of Clubcard and loyalty initiatives is treated as a deduction from sales and part of the fair value of the consideration received is deferred and subsequently recognized over the period that the awards are redeemed.

The fair value of the points awarded is determined with reference to the fair value to the customer and considers factors such as redemption via Clubcard deals versus money-off-in-store and redemption rate.

Computers for Schools, Sport for Schools and Club vouchers are issued by Tesco for redemption by participating schools/clubs and are part of our overall Community plan. The cost of the redemption (i.e., meeting the obligation attached to the vouchers) is treated as a cost rather than a deduction from sales.

Inventories

Inventories comprise goods held for resale and properties held for, or in the course of, development and are valued at the lower of cost and fair value less costs to sell using the weighted average cost basis.

Use of non-GAAP profit measures – underlying profit before tax

The Directors believe that underlying profit before tax and underlying diluted earnings per share measures provide additional useful information for shareholders on underlying trends and performance. These measures are used for internal performance analysis. Underlying profit is not defined by IFRS and therefore may not be directly comparable with other companies' adjusted profit measures. It is not intended to be a substitute for, or superior to IFRS measurements of profit.

The adjustments made to reported profit before tax are:

• IAS 32 and IAS 39 "Financial Instruments" – fair value re-measurements. Under IAS 32 and IAS 39, the Group applies hedge accounting to its various hedge relationships when allowed under the rules of IAS 39 and when practical to do so. Sometimes the Group is unable to apply hedge accounting to the arrangements but continues to enter into these arrangements as they provide certainty or active management of the exchange rates and interest rates applicable to the Group. The Group believes these arrangements remain effective and economically and commercially viable hedges despite the inability to apply hedge accounting.

Where hedge accounting is not applied to certain hedging arrangements, the reported results reflect the movement in fair value of related derivatives due to changes in foreign exchange and interest rates. In addition, at each year end, any gain or loss accruing on open contracts is recognized in the Group Income Statement for the financial year, regardless of the expected outcome of the hedging contract on termination. This may mean that the Group Income Statement charge is highly volatile, while the resulting cash flows may not be as volatile. The underlying profit measure removes this volatility to help better identify underlying business performance.

• IAS 19 "Employee Benefits" – non-cash Income Statement charge for pensions. Under IAS 19 the cost of providing pension benefits in the future is discounted to a present value at the corporate bond yield rates applicable on the last day of the previous financial year. Corporate bond yield rates vary over time which in turn creates volatility in the Group Income Statement and Group Balance Sheet. IAS 19 also increases the charge for young pension schemes, such as Tesco's, by requiring the use of rates which do not take into account the future expected returns on the assets held in the pension scheme which will fund pension liabilities as they fall due. The sum of these two effects can make the IAS 19 charge disproportionately higher and more volatile than the cash contributions the Group is required to make in order to fund all future liabilities. Therefore, within underlying profit we have included the "normal" cash contributions for pensions but excluded the volatile element of

IAS 19 to represent what the Group believes to be a fairer measure of the cost of providing post-employment benefits.

IAS 17 "Leases" impact of annual uplifts in rent and rent-free periods. The amount charged to the Group Income Statement in respect of operating lease costs and incentives is expected to increase significantly as the Group expands its international business. The leases have been structured in a way to increase annual lease costs as the businesses expand. IAS 17 requires the total cost of a lease to be recognized on a straight-line basis over the term of the lease, irrespective of the actual timing of the cost. This adjustment also impacts the Group's operating profit and rental income within the share of post-tax profits of joint ventures and associates.
IFRS 3 (Revised) "Business Combinations" intangible asset amortization charges and costs arising from acquisitions. Under IFRS 3 intangible assets are separately identified and fair valued. The intangible assets are required to be amortized on a straight-line basis over their useful economic lives and as such is a non-cash charge that does not reflect the underlying performance of the business acquired. Similarly, the standard requires all acquisition costs to be expensed in the Group Income Statement. Due to their nature, these costs have been excluded from underlying profit as they do not reflect the underlying performance of the Group.
IFRIC 13 "Customer Loyalty programs" fair value of awards. The interpretation requires the fair value of customer loyalty awards to be measured as a separate component of a sales transaction. The underlying profit measure removes this fair value allocation to present underlying business performance, and to reflect the performance of the operating segments as measured by management.
IAS 36 "Impairment of Intangibles" impairment of goodwill arising on acquisitions. The remaining carrying value of goodwill relating to Japan was not fully recoverable and was fully impaired during the year. The resulting non-cash charge does not reflect the underlying performance of the business.
Restructuring costs. These relate to certain costs associated with the Group's restructuring activities and have been excluded from underlying profit as they do not reflect the Group's underlying performance.

BUSINESS

Overview

Our Strategy

• Keep our core UK business strong and growing**.** Our UK market is the core of our business, representing 68% and 72% of our trading profit (at actual exchange rates) in the 52 weeks ended February 26, 2011 and the 26 weeks ended August 27, 2011, respectively. We believe that this strong foundation can continue to provide support for our UK and worldwide growth. We plan to further grow our UK business by continuing to leverage and expand our Tesco Clubcard loyalty program, continuing to develop our store network and refresh store space to provide local customers the type of shopping environment most convenient for them, increasing our emphasis on product quality and remaining focused on delivering the best value to all customers.

Our Tesco Clubcard loyalty program (whereby customers earn points every time they make a purchase from us) continues to be a significant driver of growth for our business and has resulted in high levels of customer loyalty. We use the information we collect on customers' shopping habits through the program to serve our customers better, while at the same time rewarding their loyalty through discount vouchers. We have more than 15 million active Clubcard memberships as of February 26, 2011, compared with approximately 13 million in February 2008. In addition, we have expanded our Partner Reward Scheme, with participation in the scheme growing by 60% in the 52 weeks ended February 26, 2011 compared to the 52 weeks ended February 27, 2010.

We expect to continue adding new store space to drive sales growth and opened more than 200 new stores in the 52 weeks ended February 26, 2011, including more than 150 Tesco Express stores, with customer visits to these stores increasing by 80 million within a year. We have also refreshed or extended more than 400 stores since February 2010, resulting in positive feedback from our customers.

Since February 2010, we have introduced more than 2,000 new and improved food products, with sales of our Finest range of food products increasing by 6% in the 52 weeks ended February 26, 2011 compared with the previous 52-week period. We have also increased sales of local products to approximately £1 billion in the 52 weeks ended February 26, 2011, up from approximately £850 million in the 52 weeks ended February 27, 2010.

To maintain our focus on helping customers save money, we launched the Big Price Drop in September 2011 by making some very substantial changes, including lowering prices, introducing sharper promotions and putting much more emphasis on the great value of Tesco brand products. Specifically, we are investing over £500 million in reducing more than 3,000 prices, including on 1,000 Tesco brand products, as well as simplifying and deepening our promotional discounts. Future cuts in prices will continue to focus on products that families buy most frequently. These moves represent the most significant changes to our pricing and promotions strategy in recent years.

• Become an outstanding international retailer in stores and online**.** We have been expanding into markets outside the United Kingdom since the mid-1990s, with operations in 13 countries outside the United Kingdom and are either the largest or second largest by sales in eight of these markets. In aggregate, our international businesses represented 25% and 26% of our trading profit (at actual exchange rates) in the 52 weeks ended February 26, 2011 and the 26 weeks ended August 27, 2011, respectively. Total international sales increased from £19,423 million in the 52 weeks ended February 27, 2010 to £22,083 million in the 52 weeks ended February 26, 2011, or 14% (at actual exchange rates). Total international trading profit increased from £749 million to £911 million, or 22% for the same periods. We plan to continue our already-successful international expansion by further expanding our business in our existing markets outside the United Kingdom through the introduction of multi-channel and multi-format retailing.

In Asia, we opened 3.5 million square feet of gross new space in the 52 weeks ended February 26, 2011, with trading profit in the region increasing by 30% (at actual exchange rates) compared to the 52 weeks ended February 27, 2010, and we plan to open a further 4.7 million square feet in the 2012 financial year. However, in line with our targets to improve investment returns, we have announced the intention to sell our operation in Japan, having decided we cannot build a sufficiently scalable business there.

In Europe, we opened 2.6 million square feet of gross new space in the 52 weeks ended February 26, 2011, with trading profit in the region increasing by 11% (at actual exchange rates) compared to the 52 weeks ended February 27, 2010, and we plan to open a further 2.9 million square feet in the 2012 financial year.

In the United States, we opened 32 new stores in the 52 weeks ended February 26, 2011 and plan to open approximately 50 new stores in the 2012 financial year. Although we recorded a 13% increase in trading losses in the region during the 52 weeks ended February 26, 2011 compared to the 52 weeks ended February 27, 2010, primarily due to the initial costs of integrating our two dedicated fresh food suppliers and to exchange rates; we expect improvements in sales densities, the growing scale of the store network and improving

productivity in our distribution center and manufacturing campus to reduce losses going forward. During the 26 weeks ended August 27, 2011, trading losses for the United States reduced by 23.2%, compared to the prior 26-week period. This improved performance was attributable to steady sales growth, substantial improvements to operating ratios in established stores, higher sales densities in new stores and improvements in supply chain efficiencies, particularly in our manufacturing facilities.

• Be as strong in everything we sell as we are in food**.** We have grown sales and expanded our offering of general merchandise, clothing and electrical products and strive to continue to do so going forward. Overall sales in these categories (excluding health & beauty and household goods) increased by 8.8% in the 52 weeks ended February 26, 2011 compared to the 52 weeks ended February 27, 2010 and represented 15% of total Group sales in that year. We plan to improve our selection of non-food items and our fulfilment options in order to grow our share of the market for the items we sell, and to utilize and improve our global sourcing capabilities to buy better, improve quality and sell more.

In the United Kingdom, we aim to improve the performance of general merchandise in three ways. First, we plan to continue investing in making our ranges more aspirational. We were the first UK supermarket to stock the Apple iPad and the Amazon Kindle, and we intend to keep pace with new products to offer customers the latest electrical innovations. Second, we plan to continue enhancing customers' shopping experience with specialist advice, particularly in relation to electrical items such as TVs, cameras, mobile phones and satellite navigation systems. In more than 200 of our largest stores, we have Tesco Tech Support teams specifically trained to help customers with queries on electrical items. We also have a free electrical helpline manned by fully trained engineers and a dedicated Tech Support website. Finally, we will continue to develop our multi-channel capability by making it easy for customers to shop in whatever way suits them – online, in-store or from catalogues. Our online clothing website, launched in the 52 weeks ended February 27, 2010, has made us the fasted growing online retailer in the clothing, footwear and accessories market. In October 2011, we extended our delivery service for our online clothing business to include certain European markets. In addition, we have increased the number of products available through Tesco Direct to around 23,000 in the 52 weeks ended February 26, 2011 and plan to launch a significant upgrade to our online Direct shop, featuring additional range and functionality, during the first half of 2012. This will also include the first phase of "Marketplace", which will enable customers to buy from selected sellers on tesco.com.

In Europe, we plan to continue expanding our product offerings and remodeling hypermarkets to the Extra format to provide a better shopping environment and improved range for customers. We are currently the clothing market leader by sales in the Czech Republic, Hungary and Slovakia. In Asia, we have seen strong general merchandise growth, with particularly pleasing increases in our electrical products, particularly in China and Thailand. Our F&F clothing brand launched in South Korea and Thailand in the 52 weeks ended February 26, 2011, and the early response from customers has been excellent. In addition, we opened three Sports Multishops in Homeplus stores in South Korea in the 52 weeks ended February 26, 2011 and intend to open ten more stores in the 2012 financial year.

• To grow retail services in all our markets**.** We want all of our customers, across all of our markets, to have access to our financial, telecoms and online services, which together accounted for approximately 16% of our total trading profit in the 52 weeks ended February 26, 2011. We believe we can do this by successfully leveraging the Group's skill and scale, building on the knowledge we have acquired from our retail services experience in the United Kingdom, the Republic of Ireland and South Korea and continuing to introduce retail services and product innovations.

In the 53 weeks ended February 28, 2009, we increased our stake in Tesco Personal Finance PLC ("Tesco Bank") to 100% from 50%. Since that time we have introduced two new products: the Fixed Rate Saver, launched in autumn 2010, and a seven-year retail bond, launched in 2011. We plan to introduce additional products, including mortgages in 2012 and current accounts at a later date to further diversify our funding base and increase the proportion of long-term funding available to the bank.

Our online businesses, telecommunications business and consumer research business all demonstrated strong growth in the 52 weeks ended February 26, 2011. For our online businesses, this growth was driven by the introduction of an iPhone grocery app, the addition of 350 vans to increase UK-wide delivery capacity and improvements to our multi-channel shopping offerings through Tesco Direct. In telecoms, we increased the number of mobile handsets on offer, including smartphones such as Android and HTC models, and launched an international calling card, which has generated sales of more than £2 million to date. We aim to support further growth by continuing to introduce such innovations.

Put the community at the heart of what we do**.** We are committed to tackling the issues that matter to our communities and society at large. In furtherance of this strategy, we will continue to work hard to be a good neighbor in the communities in which our stores are located, to demonstrate leadership in environmental issues and to build a long-term sustainable business. To do so, we have developed the following five community promises by listening closely to our customers and staff:
- buy and sell our products responsibly;
- care for the environment;
- provide customers with healthy choices;
- actively support local communities; and
- create good jobs and careers.

We are keeping these promises in a number of ways. For example, we work in partnership with local suppliers to ensure products are sourced to robust ethical and environmental standards. We have also pledged to become a zero-carbon business by 2050 and opened the world's first zero-carbon supermarket in Ramsey, Cambridgeshire. In July 2011, the Carbon Disclosure Project ranked Tesco one of the top ten global businesses and best global retailer at tackling climate change. We are also working to help our customers reduce their carbon footprints by 50% by 2020.

To support local communities, we have launched numerous community outreach programs in the countries in which we operate and made contributions of £64 million to community projects in the 52 weeks ended February 26, 2011. We also sponsor a variety of health-based programs and events to encourage communities to be physically active. Examples include the Tesco Great School Run in the United Kingdom, in which over a million children have taken part, and our record-breaking Tesco Lotus Mother's Day Aerobic Marathon in Thailand, in which over 15,000 took part. Finally, we are dedicated to providing diverse career opportunities for our staff worldwide and have expanded our Regeneration Partnership to help long-term unemployed people get back to work following an eight-week training course on life skills and confidence building, after which they begin work in our stores.

Be a creator of highly valued brands. Our brand has evolved from a logo above a few stores in the United Kingdom to a wide range of store, product and service brands around the world. By building brands through our own products, we offer customers increased value, choice and quality and promote customer loyalty. This applies to our retail Tesco brand as well as our pillar brands such as Finest and Value and our product brands such as Technika and F&F, which is now available in over 450 stores across the UK and in nine other markets across Europe and Asia.
Build our team so that we can create more value. As our business continues to grow and diversify, we will continue to share operational and leadership excellence across the Group so that we can successfully develop capability and nurture talent throughout our growing business. We will also continue to provide our people with opportunities to develop their skills across new product areas, services and countries. We believe that home-grown managers make valuable business leaders because they understand our culture and approach. To support long-term retention, we currently have almost 30,000 people on development programs across the business to help them gain the knowledge, leadership skills and qualifications for their next roles at Tesco.

Our Key Strengths

We believe that we benefit from the following key strengths:

Broad customer base**.** We are the United Kingdom's largest food retailer by sales according to Kantar Worldpanel, and have been operating our UK business for over 80 years. While we are proud of our successes, we believe that our company culture – summarized in our two key values "no one tries harder for customers" and "treat people as we like to be treated" – is to constantly look for little ways to improve our customers' experience. To that end, we use customer surveys, our loyalty card program, and other ways of engaging with our customers and the communities in which we operate in order to keep abreast of changing customer preferences and tastes.
Customer-focused culture**.** Our focus is to make all facets of our customers' shopping experience better, a focus we express through our core vision to create value for customers and earn their lifetime loyalty, and our signature "every little helps" brand philosophy. "Every little helps" recognizes that small improvements, such as making our stores a bit easier to get around, having a little more choice, being a bit cheaper than our competitors, saving our customers a few minutes at the checkout and making sure our staff give the best possible service, ultimately improve our customers' experience in a significant way. We put the "every little helps" concept to work in many different ways. For example, in the 52 weeks ended February 26, 2011 we launched our "Every Comment Helps" initiative to encourage customers to give instant feedback on their shopping trip – including both the customer service they receive and the range of products we offer. Customers are able to share their feedback via text or email. Over 20,000 of the comments that we have received have been compliments about the service which our customers have received. All of the comments have helped us to understand what's important to customers, identify where we can do better and put plans into action. We have also continued to use technology to deliver great service. Our self-service checkouts provide customers with a quick and easy option, and currently account for over ten million transactions per week. Our trials of "Scan as you Shop", which uses hand-held technology have also been well received by customers.
Strong, experienced management team**.** Our management team currently includes four senior executives who have been with us for over 20 years, many of whom have held multiple roles with us during that time. This team has a proven track record of achieving growth and has led our successful international expansion and expansion into our general merchandise, personal financial services and telecommunications lines. We believe that the team's breadth and depth of experience has been and will continue to be instrumental to our growth and success.
Supportive and respectful relationship with our staff**.** We treat people how we like to be treated because we want our people to enjoy working at Tesco. By creating an open environment of trust and respect, our people feel supported, they share their knowledge and experience and work hard to give our customers great service. Every year, we build our plans for the year around our "People Promises": to be treated with respect, to have opportunities to get on in their careers, to have a manager who helps them and to have an interesting job. Through our People Promises as well as our attractive and competitive benefits package, our people stay with us for a long time. Around half of our director population has at least 12 years' service.

As part of our ongoing commitment to building capability, we are investing in the Tesco Academy, which supports the development of our people through training courses, networking opportunities and mentoring. We also provide skills development, mentoring and networking opportunities for our female managers and directors through our Women's Network, and the number of female directors in the UK has increased by nearly 70% in the last four years. We have also launched our Women in Leadership program this year, which consists of seminars and courses focusing on confidence, strategic career planning and building person authority for over 50 women from our UK and European business who have been nominated based on their potential to undertake bigger and broader roles.

Our people do a great job for our customers, and we want them to feel valued and rewarded to build trust and loyalty amongst our employees. We invest in pay and, in the UK, we have the highest basic pay rates for customer assistants of any major supermarket. All of our staff move to higher rates of pay within a year of joining our business. Across all of our markets, we offer a wide range of competitive benefits. In the US, for example, we pay at least 75% of medical, dental, prescription and vision costs. We already operate a staff Clubcard, which offers staff a discount when they shop in our stores, in Thailand, Malaysia and China, and plan to introduce the staff Clubcard into Korea later this year. In the UK, we have a defined benefit pension scheme that provides people with an annual income at retirement as well as benefits on ill health and death based on their pay and service. We also have share ownership incentive schemes help our staff to get their own personal stake in Tesco. For example, 216,000 staff shared a total of £105.5 million when the Shares In Success scheme matured in 2010.

History

The first Tesco store was opened in 1929 in north London by Jack Cohen, who had begun selling groceries from a stall in London's East End ten years earlier. The business became a private limited company in 1932, and in 1947 the company's shares were listed on the London Stock Exchange. Our first self-service supermarket opened in a converted cinema in 1956, and by 1961, our Leicester store entered the Guinness Book of World Records as the largest store in Europe. By 1979, our annual sales had reached £1 billion. During the 1980s, our UK business expanded quickly, with annual sales reaching £2 billion by 1982, and 1987 seeing our announcement of a £500 million program to build another 29 stores in the

United Kingdom. During the 1990s we began our international expansion, entering Hungary and several other European countries starting in 1994, and entering Asia starting in 1998. In 1995 we became the United Kingdom's largest food retailer.

In 1999, we launched our online banking business, and in 2000 we launched our tesco.com online grocery shopping service. In 2002, we began operations in Malaysia and began offering "Free From" products for customers with special dietary needs. In 2003, we began operations in Turkey and Japan, and in 2004 we entered China and also launched our own Fair Trade range as well as Tesco Broadband. In 2006, we launched Tesco Direct to make our non-food offerings more accessible to UK customers through our catalog and website in addition to in our stores. In 2007, we opened our first Fresh & Easy in the United States. In 2008, we acquired 36 hypermarkets in South Korea from Homever and completed the acquisition of Tesco Personal Finance. We also launched our Discount Brands that year. In 2009, we launched our tesco.com/clothing online clothing business and re-launched our Clubcard program in the United Kingdom following a £150 million investment offering customers the chance to double up their vouchers. In 2010, we opened the world's first zero-carbon supermarket in Ramsey, Cambridgeshire and opened our first "lifespace" mall in Qingdao, China. In 2011, our new Group CEO announced our updated strategy and vision.

In September 2011, Tesco Lotus announced plans to launch an initial public offering of a Thai property fund as part of its property strategy. See "—Asian Property Funds" below.

Our Group

We are a publicly-held company, and except as indicated in "Shareholders", we have received no notification that any shareholder beneficially owns more than 3% of our ordinary shares. We are a holding company, and are the ultimate parent company of our group. Our business is conducted by several whollyowned operating subsidiaries, including Tesco Stores Limited, which holds our UK store, distribution and office assets and Tesco Personal Finance Group Limited, which trades as Tesco Bank and conducts our personal financial services. We also operate through a number of 50-50 joint ventures, for example Tesco Mobile Limited, which conducts our telecommunications services. Our operations outside the United Kingdom are generally conducted by entities incorporated in the relevant jurisdictions.

Our Business Segments

We divide our business into five segments, based on our management and internal reporting structure: UK operations, operations in Europe excluding the United Kingdom (which we refer to simply as "Europe"), operations in Asia, operations in the United States and Tesco Bank operations. Our UK segment includes all of our operations in the United Kingdom (other than personal financial services). Our Europe segment includes our operations in the Republic of Ireland, Poland, Hungary, the Czech Republic, Slovakia and Turkey. Our Asia segment includes our operations in South Korea, Thailand, China, Malaysia, India and Japan; however, we expect to sell our operations in Japan within 12 months of our most recent balance sheet date. Our US segment includes all of our operations in the United States. Our Tesco Bank segment includes all of our operations relating to the provision of personal financial services in the United Kingdom.

UK Segment

Overview

The UK market is our largest segment and represents the core of our business.

Our UK segment accounted for 68% and 72% of our trading profit (at actual exchange rates) in the 52 weeks ended February 26, 2011 and the 26 weeks ended August 27, 2011, respectively.

In our UK segment, our operations include (i) our retail operations, which comprises our retailing of food, non-food products (general merchandise, clothing and electrical products) and gasoline at our store locations and a portion of the sale price from in-store sales of telecommunications services, and (ii) our retailing services, which include telecommunications services, dunnhumby (our customer research business) and sales of food and non-food on tesco.com and direct.tesco.com (Tesco Direct).

Retail Operations

Our retail operations include our retailing of food, non-food products (general merchandise, clothing and electrical products) and gasoline at our store locations and a portion of the sale price from instore sales of telecommunications services and products.

UK Stores

Our UK stores take one of six standard formats depending on what we determine is appropriate for a particular location: the One Stop store, the Tesco Express store, the Tesco Metro store, the Tesco superstore, the Tesco Extra hypermarket and the Homeplus non-food only store.

One Stop stores, which are our smallest stores and tend to be located in smaller UK communities.
Tesco Express stores, which can be up to 3,000 square feet, are convenience-store style, and normally feature a range of product lines, including fresh produce, wines and spirits, bakery and certain non-food items such as news and magazines. Tesco Express stores are designed to offer customers value, quality and fresh foods close to where they live and work, and tend to be located in urban sites or neighborhood locations, including those suited to gasoline retailing.
Tesco Metro stores, which are generally between 7,000-15,000 square feet (but can be as small as 5,000 square feet or as large as 30,000 square feet), are designed to be a convenient grocery-shopping destination for people who live and work in town and city centers, and generally contain a tailored range of food items, including ready-made meals and sandwiches, as well as certain non-food items.
Tesco Superstores, between 20,000-60,000 square feet, are designed to contain everything a customer needs in his or her weekly grocery-shopping trip, and in recent years we have introduced a number of non-food ranges such as clothing, DVDs and books into superstores. Tesco superstores are located in a variety of areas, including suburban areas, just outside suburban areas or town or city centers.
Tesco Extra hypermarkets, which are 60,000 square feet and above, feature the widest range of food items, and also a comprehensive range of general merchandise, including clothing, electronics and telecoms. Tesco Extra hypermarkets tend can be located in a variety of areas, including suburban areas, just outside suburban areas or town or city centers.
Homeplus stores, between 35,000 to 50,000 square feet, offer the widest range of our nonfood items, and also feature Tesco Direct collection points where customers can collect items ordered via our catalog or website. Homeplus stores do not sell food.

In addition, our wholly-owned subsidiary Dobbies Garden Centres Ltd ("Dobbies") operates 28 stores in England and Scotland as of February 26, 2011 that sell plants, gardening equipment and food and offer our customers environmentally conscious products such as water recycling and alternative power source systems.

As of February 26, 2011, we owned and operated a total of 2,715 stores in the United Kingdom (a total of 36.7 million square feet), including 1,285 Tesco Express stores (a total of 2.9 million square feet), 521 One Stop stores (a total of 0.8 million square feet), 470 Tesco Superstores (a total of 14.0 million square feet), 212 Tesco Extra hypermarkets (a total of 15.1 million square feet), 186 Tesco Metro stores (a total of 2.1 million square feet) and 13 Homeplus stores (a total of 0.6 million square feet). We opened more than 150 new Tesco Express stores in the 52 weeks ended February 26, 2011, with customer visits to these stores increasing by 80 million during that period, and have refreshed or extended more than 400 stores since February 2010.

Retail Products

Food

We sell a variety of groceries in our stores and on our website at tesco.com. Our food products include foods marketed under our private brands as well as other branded and non-branded products.

In order to appeal to specific customer groups, we offer several product ranges, including our "Finest" range, a broad range of high-quality foods designed to appeal to customers looking for premium quality goods; our "Tesco Ingredients" range, which includes herbs and other seasonings designed to appeal to customers who prepare their own food; our "Free From" range, which features products designed to appeal to customers with food allergies by omitting certain common allergens from recipes, and clearly indicating this on the products' labeling; our "Wholefoods" range, which is designed to appeal to customers who seek out nutritious, minimally processed foods by offering such products as nuts and seeds, dried beans, and products containing whole grains; our "Organics Range", which includes foods grown, raised or manufactured without the use of certain pesticides or other chemicals; and our "Healthy Eating" range, which includes a variety of foods with lower fat, sodium and sugar and with clear labeling to facilitate customer awareness of their intake of these nutrients. Our "Goodness" range includes products such as organic bananas and nutritionally balanced ready meals designed to appeal to nutrition-conscious parents and their children.

In order to appeal to customers' increasing interest in the nutritional contents of food, in 2005 we were the first UK retailer to put nutritional information on the front of food packs. In 2011, we introduced nutrition labeling on the food we serve in our UK in-store cafes. This labeling makes it easier for customers to determine their daily intake of certain nutrients by listing the amount of certain key nutrients clearly on the front of product labeling. We have found that this labeling has had the added benefit of driving sales of our more healthy products, and we have been cutting levels of salt, sugar and saturated fats across our ranges since 2005, and subsequently have reformulated over 3,600 UK products to improve their nutritional content (600 UK products in the 52 weeks ended February 26, 2011 alone).

In response to customer concern about climate change, we have worked with The Carbon Trust Ltd., an independent not-for-profit company set up by the UK Government, and other stakeholders to develop a universal carbon footprint label that describes the emission associated with each product. Since January 2008 we have carbon footprinted 1,100 products in the UK, and carbon labeled 525 everyday products. This allows our customers to compare the carbon footprint of our products in the same way they compare nutritional content.

Non-Food

We sell a variety of non-food items in our stores, including clothing, consumer electronics, toys and sports, do-it-yourself, kitchenware and soft furnishings, seasonal goods such as barbeques and garden products, DVDs, and stationery and news and magazines. Selected locations also have in-store opticians and pharmacies. All of our store locations sell some non-food items, but our Extra and Homeplus store formats offer the widest selection.

Our non-food offerings include own-brand items that we sell under the Value, Tesco and Finest brand names. We also offer a large number of products under other brand names including clothing and homewear under F&F, electricals under Technika and kitchen equipment under "Go Cook". We also offer other leading brands as part of our non-food range. Through Dobbies, we offer our customers Dobbies' traditional product offerings and also plan to offer a wider range of environmentally-conscious products such as water recycling and alternative power source systems. We plan to continue increasing our selection of non-food items as part of our strategy to be as strong in everything we sell.

Gasoline

We operate gas stations located adjacent to certain of our stores throughout the United Kingdom and in certain of our other markets.

Retail Services

Our retail services include telecommunications services, online sales of groceries on tesco.com and non-food items through direct.tesco.com (Tesco Direct) and our consumer research business dunnhumby. We also provide personal finance services through our Tesco Bank segment, which is described in "— Tesco Bank" below.

Telecommunications

We offer our customers in the United Kingdom a range of telecommunications services, including pre-paid mobile phone, home phone, internet phone and home internet services through our websites direct.tesco.com (Tesco Direct) and phone-shop.tesco.com (Tesco Mobile) and in over 200 of our in-store phone shops. In the 52 weeks ended February 26, 2011 Tesco Mobile was one of the fastest growing UK mobile networks, growing its customer base by 24% to over 2.5 million.

Tesco Mobile, our mobile phone service, is offered to our customers on a pay-as-you-go or pay monthly basis through a joint venture with O2 (UK) Limited, a leading provider of mobile services to consumers and businesses in the United Kingdom.
Internet Service, which offers customers broadband through a contractual arrangement with a third party.
Home Phone Service, which offers our customers a traditional fixed-line home phone service on a pay-as-you-go basis or on a monthly fee basis, with a choice of service/rate packages. This service is provided through contractual arrangements with third parties.

In addition, in 2010, we entered the international calling card market. The market has recently been investigated by OFCOM, and Tesco was one of the top performing service providers praised for its value, clarity and customer service. Our international calling card has generated sales of over £2 million since launching and around 16,000 cards are sold in-store every week.

In September 2011, we announced a significant step towards the development of an international mobile business through the creation of a joint venture between Vodafone and Tesco Hungary.

Tesco.com and Tesco Direct

Since 1995, our customers have been able to order grocery items for home delivery using our website at tesco.com. In 2011, we invested in additional capacity in grocery deliveries – for example with the extension of Sunday deliveries and also one-hour time slots in London. In 2006, we launched Tesco Direct to make our non-food offerings more accessible to customers through our catalog and website in addition to in our stores. Customers can browse in a catalog, order online and then collect in-store, or they can order in-store and have the goods delivered to their home. In the 26 weeks ended August 28, 2010, we announced 50% of all Tesco Direct electrical purchases were picked up in-store through our click and collect service, which is now available in over 500 stores. Tesco Direct also sells a variety of our non-food items and a wider range of products, including larger, bulkier items such as home furnishings. More than 23,000 products are currently available through Tesco Direct. During the first half of 2012, we aim to launch a significant upgrade of our online Direct shop, featuring additional range and functionality. This is also expected to include the first phase "Marketplace", enabling customers to buy from selected sellers.

Regardless of whether our UK customers make purchases from us in a store or on our website, they are able to take advantage of the Tesco Clubcard program. In this loyalty program, customers can apply for a Clubcard account, and then earn points every time they make a purchase from us or from certain other vendors who are our partners in the program. We send customers discount vouchers tailored to their shopping habits that entitle them to discounts that are linked to the points they have accumulated. These vouchers can be redeemed online or at UK store locations. In addition to using the Clubcard program to encourage and reward customers' loyalty to us, we use the information we collect on customers' shopping habits to better serve them. Our Clubcard program currently has over 15 million active members. Approximately three million customers participated in the Big Clubcard Voucher Exchange programs held in August and November 2010, which provided new ways to get more value from vouchers through category-specific deals. We have also expanded our Partner Reward Scheme, which grew in participation by 60% in the 52 weeks ended February 26, 2011 compared to the 52 weeks ended February 27, 2010.

Dunnhumby

Since the launch of Clubcard in the UK in 1995, dunnhumby has worked with Tesco and now works across the 12 markets where Clubcard is available. Following our acquisition of the final 10% of the business in the first half of the year, dunnhumby is now a wholly owned subsidiary of Tesco.

By analyzing data from over 340 million people in 25 countries, dunnhumby helps companies to put their customers at the center of every business decision to improve like-for-like sales and profit margins. Employing more than 1,500 people in 30 offices in Europe, Asia and the Americas, dunnhumby serves a prestigious list of companies including Kellogg's, The Kroger Co., Müller, Procter & Gamble, Coca-Cola and Mars.

In the 52 weeks ended February 26, 2011, dunnhumby's sales and profits increased by over 30% compared to the 52 weeks ended February 27, 2010, with strong growth in the UK supplier business and from its overseas joint ventures with retailers.

Seasonality

Our UK segment's business is seasonal to a certain extent. Generally, its highest volume of sales occurs in the fourth fiscal quarter, which includes the holiday season, and the lowest volume occurs during the first fiscal quarter.

Competition

In our UK segment, we compete with a wide range of grocery retailers including the other major UK supermarket chains, convenience store chains and a large number of independent local retailers. We compete with a wide range of operators in our sales of non-food, including national and local retailers. For the telecommunications services we offer, we compete with other multinational and national telecommunications providers.

Supply and Distribution

We work with many suppliers throughout the United Kingdom and internationally, with many of whom we have long-term relationships. Our supply chain consists of various different types of suppliers, which range from individual farmers and growers to processors, manufacturers and distributors, with whom we have a variety of business relationships. We are a signatory to the UK Supermarket's Code of Practice, a UK government code that governs signatory supermarkets' relations with their suppliers, and we train our buyers to promote understanding and compliance with the Code. We enter into a variety of buying arrangements with our suppliers, which include contracts of varying length and spot-market purchases. Our UK private label foods are supplied by a variety of suppliers, no single one of which supplies a material proportion of our private label products, under contracts of varying length. To ensure the quality and safety of the food and non-food we sell in our stores, all of our suppliers are required to adhere to the food safety standards of the British Retail Consortium, and are subject to compliance audits by third party audit companies. Our employees also conduct audits of certain of our suppliers' operations to ensure compliance with our standards. We believe that our relationship with our suppliers is good.

We employ buyers throughout the United Kingdom and in regional offices in our other markets. Our buyers function as our main contacts with our suppliers, and are responsible for selecting goods or services and entering into buying arrangements on our behalf. Particularly in sourcing our non-food items in the United Kingdom, we utilize our global network of buyers to save on our inventory purchases by sourcing purchases from the best-value markets. We plan to continue to develop our sourcing and supply chain for non-food items as part of our strategy to grow this portion of our business.

Regardless of the source of our goods, we require each of our suppliers worldwide to operate in a safe, ethical and legal manner. We are a member of the Ethical Trade Initiative (the "ETI"), a UK-based organization of commercial companies, labor unions and non-governmental organizations that brings these organizations together to collaborate on ethical standards in the good-sourcing context. We require each of our suppliers to adhere to the ETI Base Code, which prohibits our suppliers from employing certain abusive labor practices such as forced or prison labor or child labor and discrimination, and requires the payment of a living wage. We employ teams of trading standards experts who carry out ethical audits of our suppliers to determine compliance with these standards.

As of February 26, 2011, we operated 25 distribution centers in the United Kingdom. Generally, our fleet of trucks picks up stock from suppliers' locations or from ports or airports where stock has arrived from suppliers, and brings it to one of our distribution centers. In the distribution center, stock is sorted and repacked for delivery to the stores served by that distribution center. From there, our fleet of trucks transports stock to our stores. A small proportion of our goods are delivered directly to our stores by our suppliers.

International Strategy

Since 1994, Tesco has been investing in markets outside the United Kingdom, seeking new opportunities for growth and the generation of long-term returns. Our International businesses consist of the Asia, Europe and US segments. We believe that a long-term approach is required to succeed as an international retailer, and we have evolved our international strategy based on six elements:

Be flexible. Each market is unique and requires a different approach.
Act local. Local customers, local cultures, local supply chains and local regulations require a tailored offering delivered by local staff.
Maintain focus. Being the leading local brand is a long-term effort.
Use multiple formats. No single format can reach the whole market. A spectrum from convenience stores to hypermarkets must be considered and we need to take a discounter approach throughout.
Develop capability. Skill, not scale, is most important so we strive for capability through people, processes and systems.
Build brands. Brands enable the building of important lasting relationships with customers.

Asia Segment

Overview

We opened our first stores in Asia in 1998. Since then our Asia segment has grown significantly and now includes operations in China, Malaysia, South Korea, Thailand and Japan. However, in line with our targets to improve investment returns, we have announced our intention to sell our operations in Japan, having decided we cannot build a sufficiently scalable business there. In the 52 weeks ended February 26, 2011, we had a net addition of 189 stores bringing the total to 1,419 stores (a total of 35.0 million square feet). Our Asia segment represented 15% (including Japan) and 16% (excluding Japan) of our total trading profit (at actual exchange rates) in 52 weeks ended February 26, 2011 and in the 26 weeks ended August 27, 2011, respectively.

Products and Services

Much like in our Europe segment, in Asia we sell a variety of groceries designed to appeal to local tastes and expectations in our stores and, in South Korea, also on our website. In Asia, we sell own-brand goods as well as local brands that we believe our customers know and trust. We have seen strong general merchandise growth in our Asian businesses, which are predominately hypermarket operations. In China and Thailand, we experienced significant increases in electrical product sales in the 52 weeks ended February 26, 2011. Our clothing brand launched in South Korea and Thailand in the 52 weeks ended February 26, 2011 and the early response from customers has been very positive. In addition, we opened three Sports Multishops in Homeplus stores in South Korea in the 52 weeks ended February 26, 2011 and intend to open ten more stores in the 2012 financial year.

Asia Stores

Our Asia stores are in multiple formats, with a particular emphasis on hypermarkets and increasingly on smaller formats such as convenience stores. We have developed Tesco Express formats in several countries, with over 600 stores in Thailand and over 200 in South Korea.

Country	Store Format–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
–––––––	Hypermarkets		Other––––––––––––––––––––––––		Total––––––––––––––––––––––––
	––––––––––––––––––––––––Stores––––––––	Sq. feet––––––––	Stores––––––––	Sq. feet––––––––	Stores––––––––	Sq. feet––––––––
		(millions)		(millions)		(millions)
South Korea(1)	121	10.9	233	0.8	354	11.7
Thailand	124	9.4	658	2.0	782	11.4
China(2)	93	8.1	12	0.0	105	8.1
Malaysia	37	3.3	1	0.0	88	3.3
Japan(3)	0––––––––	0.0––––––––	140––––––––	0.5––––––––	140––––––––	0.5––––––––
Total	375––––––––––––––––	31.7––––––––––––––––	1,044––––––––––––––––	3.3––––––––––––––––	1,419––––––––––––––––	35.0––––––––––––––––

The chart below shows the distribution of our 1,419 stores by country and type of store in our Asia segment as of February 26, 2011:

(1) Under the "Homeplus" brand name.

(2) Under the "Legou" brand name (meaning "happy shopper" in Chinese).

(3) In line with our targets to improve investment returns, we have announced the intention to sell our operation in Japan, having decided we cannot build a sufficiently scalable business there.

During the 2012 financial year, we plan to open a further 4.7 million gross square feet of new store space.

Our Asia stores offer products and a store layout that is designed to appeal to local tastes and expectations. For example, in China, it is customary to touch and feel products before purchasing them, and therefore our store design facilitates this. Throughout Asia, we stock brands that customers in the relevant markets are familiar with. In China, we also sell food and non-food products under our Legou Tesco brand, which we launched in October 2005.

Customers in South Korea are able to order food and non-food items via our website in much the same way as our UK customers. See "—UK Segment—Retail Services—Tesco.com and Tesco Direct" above.

Competition

In Asia, we compete with a wide range of multinational, national and local retailers.

Supply and Distribution

Our supply and distribution structure in our Asia segment is similar to that of our Europe segment. See "—UK Segment—Supply and Distribution" above for a discussion of the ethical standards and compliance assurance procedures that apply to our suppliers worldwide.

Europe Segment

Overview

We opened our first international store in Hungary in 1994. Since then our Europe segment has grown significantly, and now includes operations in the Czech Republic, Hungary, Poland, the Republic of Ireland, Slovakia and Turkey. In the 52 weeks ended February 26, 2011, we had a net addition of 128 stores in our Europe segment, bringing the total to 1,082 stores (a total of 30.2 million square feet). Our Europe segment represented 14% and 13% of our total trading profit (at actual exchange rates) in fiscal 2010/11 and in the 26 weeks ended August 27, 2011, respectively.

Products and Services

Much like in our UK segment, in our Europe segment we sell a variety of groceries designed to appeal to local tastes and expectations in our stores and, in the Republic of Ireland, also on our website, also using our own brands and local brands that our customers know and trust.

We also sell a variety of non-food items in our Europe stores, especially in our hypermarkets. We are currently the clothing market leader by sales in the Czech Republic, Hungary and Slovakia.

While the majority of Tesco Bank's activities are focused in the UK, we also deliver financial services products with partner banks in other countries in which Tesco has a presence.

Europe Stores

The hypermarket format has been the historical focus of our Central European activities. At 50,000 square feet or more, hypermarkets have the space to offer extensive food and non-food ranges. We are also pursuing a multi-format strategy for store formats to give us a competitive advantage, and to provide many avenues for future growth, including the Express and a 1,000 square meters format.

The chart below shows the distribution of our 1,082 stores by country and type of store in our Europe segment as of February 26, 2011:

Country	Store Format–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
–––––––	Hypermarkets		Other––––––––––––––––––––––––		Total––––––––––––––––––––––––
	––––––––––––––––––––––––Stores––––––––	Sq. feet––––––––	Stores––––––––	Sq. feet––––––––	Stores––––––––	Sq. feet––––––––
		(millions)		(millions)		(millions)
Republic of Ireland	11	0.7	119	2.6	130	3.3
Poland	68	5.1	303	3.0	371	8.1
Hungary	115	6.6	90	0.5	205	7.1
Czech Republic	73	4.2	85	1.0	158	5.2
Slovakia	54	2.7	43	0.7	97	3.4
Turkey	46––––––––	2.8––––––––	75––––––––	0.3––––––––	121––––––––	3.1––––––––
Total	367––––––––––––––––	22.1––––––––––––––––	715––––––––––––––––	8.1––––––––––––––––	1,082––––––––––––––––	30.2––––––––––––––––

During the 2012 financial year, we plan to open a further 4.4 million gross square feet of new store space.

Competition

In our Europe segment, we compete with a wide range of multinational, national and local retailers.

Supply and Distribution

Our supply and distribution structure in our Europe segment is similar to that of our UK segment. See "—UK Segment—Supply and Distribution" above, for a discussion of the ethical standards and compliance assurance procedures that apply to our suppliers worldwide.

US Segment

Overview

We began business operations in the United States in 2007 with the opening of a limited number of Fresh & Easy Neighborhood Market stores in Phoenix, Arizona, Los Angeles, California, San Diego, California and Las Vegas, Nevada. Since then our US segment has grown significantly. In the 52 weeks ended February 26, 2011, we had a net addition of 19 stores, bringing the total to 164 stores (a total of 1.7 million square feet). Our US segment reported increased trading losses in the 52 weeks ended February 26, 2011, primarily due to the initial costs of integrating our two dedicated fresh food suppliers and to exchange rates. Losses in the 26 weeks ended August 27, 2011 significantly reduced by 23% and the reduction in losses has been driven by strong, sustained sales growth, substantial improvements to operating ratios in established stores, higher sales densities in new stores and improving supply chain efficiencies, particularly in our manufacturing facilities. Continued strong like-for-like sales growth is driving sales per store steadily towards the levels we require. These trends, combined with benefits of the growing scale of the store network around our Riverside distribution center and manufacturing campus, give us increasing confidence that the components of a profitable business model are coming together well.

Products and Services

Fresh & Easy Neighborhood Market stores were originally modeled on our Tesco Express stores, but average approximately 10,000 square feet and sell mainly food items. These stores offer customers a one-stop shopping option as well as fresher, more local and healthier food options. We have made further changes to these stores to adapt the offer better to the needs of local customers and these changes include introducing in-store bakeries, loose produce, additional ranges in grocery, as well as many new fresh Fresh & Easy products.

Tesco Bank

Overview

Through Tesco Bank, we sell a range of products and services through multiple channels including stores, primarily in the United Kingdom, by telephone and online. While the bulk of Tesco Bank's activities are focused in the UK, we also deliver financial services products with partner banks in other countries in which Tesco has a presence.

Products and Services

Our key products and services include general insurance (such as motor, home, pet, travel, dental, health and life insurance), credit cards and personal loans, personal saving products, travel money and ATM services, and Tesco Compare, an online insurance and utilities comparison. Customers can purchase personal finance services in our stores and at tescobank.com. Since we increased our stake in Tesco Personal Finance to 100% from 50% in the 53 weeks ended February 28, 2009, we have introduced two new products: the Fixed Rate Saver, launched in autumn 2010, and a seven-year retail bond, launched in 2011. We plan to introduce additional products, including mortgages in 2012 and current accounts at a later date to further diversify our funding base and increase the proportion of long-term funding available to the bank.

Banking. We offer savings accounts with low minimum deposit requirements that allow our customers to do their banking in many of our stores, by phone or over the internet.

Insurance. We offer a wide range of insurance products, including home insurance, pet insurance, travel insurance, life insurance, health insurance, dental insurance and car breakdown insurance.

Lending. We offer personal unsecured loans, credit cards and mortgage loans to our customers. In February 2011, one in eight MasterCard and Visa credit card transactions in the United Kingdom were made on a Tesco credit card.

In addition, Tesco Bank has well-developed plans to launch mortgages, subject to FSA approval. Vertex, a leading global customer management outsourcing business, will support entry into the mortgage market by providing its application platforms and customer sales and service for Tesco Bank's mortgage business. Current accounts are another key element in widening Tesco Bank's product range, with the customer proposition and detailed program plans currently being developed.

In the 53 weeks ended February 28, 2009, we increased our stake in Tesco Bank to 100% from 50%. Since that time, we have embarked on a significant transformation program to develop and embed our own infrastructure to allow us to migrate systems and support from the RBS Group, which previously held the other 50% interest.

Competition

Tesco Bank's competition consists of other retail banks in the United Kingdom.

Property

Our property activities have one principal objective: to ensure we can retail from attractively located and designed property in our markets. At the same time, we create sustainable, long-term value for shareholders from the development and management of prime retail property and this also provides strong asset-backing to our balance sheet, with the market value of our property currently exceeding £36.0 billion (compared with a net book value of £26.3 billion).

We release some of the value we have created through carefully selected divestments of some of our property, as well as by taking advantage of strong market conditions offering good yields. Over the last five years, we have delivered more than £5 billion of proceeds in line with our stated objectives in 2006 at an average net initial yield of 4.9%. We have also generated profits from property-related items of £1.3 billion over the past five years. We have used the proceeds to invest in property assets in growth economies, buy back approximately £1.1 billion of our own shares and enhance dividends for shareholders. Going forward, we will aim to deliver £250 – £350 million per year in property profits, which we believe is a sustainable profit stream as it is broadly equivalent to the annual value we create through development activities. This will require us to divest just over £1 billion of property per year.

We believe this level of divestment is sustainable as it is expected to remain below the level of new investment in growth capital each year, thereby enabling us to continue to increase our total asset base. It is currently more attractive to divest UK property as yields and projected GDP growth in the United Kingdom are lower than in our overseas markets. Over time, however, we expect a growing proportion of the divestments to come from our other countries as properties mature. Some of these future international divestments are expected to be shopping malls that have been fully developed. In such cases, we intend to release capital for new investments by selling the mall to investors and leasing back the Tesco hypermarket. Importantly, when we do this, it will always be our objective to manage the malls after divestment to ensure they remain attractive locations from which our hypermarkets can succeed.

Shopping Malls

We are one of the world's largest operators of shopping malls, with approximately 30 million square feet of mall space across Europe and Asia. By owning and operating our own malls, we are able to ensure we have high-quality sites from which our hypermarkets can trade. Our mall business is a combination of

owning and operating existing malls – as a landlord – and building new malls as a developer. The mall business provides a stable, profitable income stream – one that has grown throughout the recession. Our significant experience in operating malls and our many long-term tenant relationships with retailers help us to design and fill our new malls.

One expansion strategy in new malls is currently in China where we are rolling out our new lifespace mall concept. The blueprint is approximately 400,000 square feet of retail and family leisure space anchored by a Tesco hypermarket. We had six malls trading as of August 2011. We have also begun redeveloping some of our older malls around the world to access their full potential. In a number of markets we are starting to convert small strips of shops alongside well-located Tesco hypermarkets into large modern shopping malls, creating compelling retail destinations.

Asian Property Funds

In February 2011, we signed an agreement to set up a 50-50 joint venture to develop shopping malls in China with a consortium of Asian investors, including Singapore-listed Metro Holdings Ltd. The total value of projects under development is approximately £170 million, with Tesco and the joint venture consortium each investing approximately £30 million of equity. Debt has been provided by banks including the Industrial and Commercial Bank of China, Shanghai Pudong Bank and Standard Chartered Bank. This joint venture will comprise of three shopping malls in Shenyang, Xiamen and Fuzhou, each of which includes a Tesco hypermarket as an anchor tenant. This follows our first joint venture to develop shopping malls in China, which we set up in 2009 for three shopping malls in Anshan, Fushan and Qinhuangdao.

In September 2011, Tesco Lotus announced plans to launch an initial public offering ("IPO") of a Thai property fund. With an appraised value of more than 14 billion Baht (equivalent to more than £300 million), the Tesco Lotus Property Fund is currently expected to initially comprise 15 existing high quality shopping malls, each anchored by a Tesco Lotus hypermarket, in prime locations across Thailand. Tesco Lotus will continue to lease all 15 hypermarkets from the Fund. The planned IPO is in line with the property strategy that we outlined in our 2011 Annual Report, where we indicated that we expected a growing proportion of our property profits to come from our International segments.

Employees and Labor Relations

At February 26, 2011 we employed 492,714 individuals worldwide, including 293,676 employees in the United Kingdom, making us the largest private sector employer in our home market. Approximately half of our UK employees are represented by the Union of Shop, Distributive and Allied Workers (the "USDAW"). Our relations with the USDAW are governed by a master "partnership" agreement, which provides the framework of our relations with USDAW, including the number, location and role of union representatives, union access to employees and our responsibilities towards union representatives. We engage in collective bargaining regarding the other terms and conditions of employment with the USDAW on an annual basis. We have not experienced any recent disruptions as a result of these negotiations. In our international business segments, labor union representation varies country by country, with union representation in varying proportions. We have had no material labor-related work stoppages and believe that our employee relations are good.

Information Technology

Since 2002, we have employed a standard suite of systems that we designed based on a survey of best practices across our operations that started in 2001. This suite of systems, which we refer to as the "Tesco Operating Model" allows direct communications between the information technology systems in our stores, distribution centers, head office and certain of our suppliers. The Tesco Operating Model is a suite of systems we have created by combining software licensed by various vendors, including Oracle, Oracle Retail Retalix and JDA. Our systems are supported by our service center in Bangalore, India with additional support from software vendors where necessary. Certain components of the Tesco Operating Model are currently in use in some of our locations, including our head office and certain distribution centers, suppliers and stores. We currently use the Tesco Operating Model in our UK headquarters, and are expanding its use to all of our markets over time. Many of our key IT processes, such as software we use in our purchasing, warehousing, merchandise management, general ledger, promotions and manufacturing and human resources activities are enabled globally by the Oracle eBusiness system, which we license from Oracle.

Intellectual Property

We have trademark and service mark registrations and applications and domain name registrations necessary to operate our business around the world, including the Tesco trade- and service-mark. We regard our protected names as having significant value to our business and to the marketing of our brands. We are not aware of any circumstances that could be expected to have a material adverse affect on our intellectual property.

Environmental Matters

We are subject to various environmental laws and regulations affecting the operation of our business, including regulations concerning waste-water disposal and licensing and consent requirements for gasoline retailing.

Regulatory Overview

Operations Excluding Tesco Bank

We are subject to various laws affecting the operation of our business. Each of our stores is subject to licensing and regulation by a number of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies, in the jurisdiction in which the store is located. Difficulties in obtaining, or the failure to obtain, required licenses or approvals can delay or prevent the opening of a new store in a particular area.

In the United Kingdom, we are subject to national and local laws and regulations concerning labor, health, sanitation and safety as well as planning permission requirements for store development and expansion. We are subject to UK and EC competition law, which, among other things, may result in inquiries into our plans to acquire new businesses or stores. We are subject to laws governing matters such as wages, working conditions, citizenship requirements and overtime. Our telecommunications operations are subject to regulation by the United Kingdom's Office of Communications and our financial services operations are subject to regulation by the United Kingdom's Financial Services Authority.

In Europe, Asia and the United States, our company and operations are subject to national and local laws and regulations, which are generally similar to those affecting our UK stores, including laws and regulations concerning labor, health, sanitation and safety. We are also subject to competition laws in these jurisdictions, which, among other things, may result in inquiries into our plans to enter or expand in these markets (including by acquiring shares in existing businesses), and may require us to obtain approval prior to doing so. Our operations in Europe and in Asia are also subject to tariffs and regulations on imported commodities and equipment and laws regulating foreign investment.

Tesco Bank Operations

Tesco Bank is subject to significant legislative and regulatory oversight. In particular, Tesco Bank has obligations under the Financial Services and Markets Act ("FSMA"), the Consumer Credit Act and the Data Protection Act.

Governmental, Legal and Arbitration Proceedings

Neither the Issuer nor any member of the Group is or has been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Issuer is aware) in the 12 months preceding the date of this document which may have, or have in such period had, a significant effect on the financial position or profitability of the Group.

On September 20, 2007, the UK Office of Fair Trading ("OFT") issued a statement of objections to the Issuer, four of the Issuer's competitors and five UK dairy processors (certain of whom have since settled with the OFT), alleging that the Issuer and those other parties conspired to fix prices for dairy products from 2002 to 2003 by sharing commercially sensitive information. On August 12, 2011, the OFT issued a decision imposing a fine of £10.4 million on Tesco. Tesco is appealing this decision.

On January 31, 2011 the Office for the Protection of Competition in the Czech Republic commenced an investigation into the Issuer's Czech business under the Act on Significant Market Power in the Sale of Agricultural and Food Products. No specific allegations of non-compliance have been made and the Issuer does not believe that the outcome of any proceedings pursuant to such investigation will have a significant impact on its financial position of profitability.

None of the claims or potential claims referred to in the above paragraphs is quantifiable.

The Group has a provision for potential customer redress. During the 52 weeks ended February 26, 2011, the FSA formally issued Policy Statement 10/12 (PS 10/12), which introduced new guidance in respect of PPI customer redress and evidential provisions to the FSA Handbook with an implementation date of December 1, 2010.

On October 9, 2010, the British Bankers Association ("BBA") applied to the courts for a judicial review in which they sought to overturn Policy Statement 10/12 issued by the FSA during the year in respect of PPI. On April 20, 2011, the BBA lost their challenge on all grounds, and subsequently decided not to appeal the decision. As a result, UK banks, including Tesco Bank, were required to consider PPI cases in accordance with Policy Statement 20/12. For further details of the provisioning at February 26, 2011, please refer to note 26 "Provisions" of the Group Audited Consolidated Annual Financial Statements.

In connection with the preparation of our Unaudited Consolidated Interim Financial Statements, we reviewed carefully the level of provisioning which is appropriate to cover possible future claims against us arising from alleged mis-selling of PPI policies through our joint venture with the RBS prior to 2008. While the level of claims brought against Tesco Bank to date has been modest (£16 million), as a result of this review, we decided to increase our provision, originally set up in 2009, by a further £57 million to £92 million. This extra provision was made in Tesco Bank's income statement for the 26 weeks ended August 27, 2011.

MANAGEMENT

We are governed by resolutions of our shareholders taken at general meetings of our shareholders, and by acts of our board of directors and committees of our board of directors.

General Shareholders' Meeting

The highest level of management, and our ultimate decision-making body, is our shareholders acting at shareholders' general meetings. Our board of directors convenes a shareholders' general meeting at least once a year. Resolutions of our shareholders are generally passed by a simple majority, although in accordance with relevant statutory requirements some resolutions require the approval of 75% of shareholders.

Only the shareholders, acting at a shareholders' general meeting, can take action relating to:

Alteration of our memorandum and articles of association;
Our reorganization and liquidation, appointment of a liquidation committee and approval of interim and final liquidation balance sheets;
Determination of the composition of our board of directors, election of its members and early termination of their powers;
Determination of the amount, nominal value and type of authorized shares;
Increases and reductions of our authorized capital;
Appointment of our auditor;
Approval of dividends;
Approval of annual statutory accounting and reports; and
Certain other matters provided for by law and our memorandum and articles of association.

Board of Directors

Our board of directors is responsible for our general management, including the determination of our strategy and coordination and general supervision, with the exception of those matters that are designated by law or by our memorandum and articles of association as being the exclusive responsibility of our shareholders. Our board of directors normally meets eight times a year and makes its decisions by simple majority. In the 52 weeks ended February 26, 2011, our board of directors met nine times. Our board of directors is currently composed of seven executive directors, eight independent non-executive directors and Mr. David Reid, non-executive chairman. Mr. Patrick Cescau is the senior independent nonexecutive director of our board of directors. The chairman of our board of directors has primary responsibility for running the board of directors. Our chief executive, Mr. Philip Clarke, has executive responsibilities for the operations, results and strategic development of the Group. Mr. Reid will retire as Chairman on November 30, 2011. Sir Richard Broadbent will take over as Chairman from November 30, 2011. Mr. Higginson, Chief Executive of Retailing Servicers, will retire from our board of directors from September 1, 2012.

The following table sets forth the name, age and position of each member of our board of directors as of October 11, 2011. We consider only the members of our board of directors to be our key managers.

Name––––––––––––––––––––––––––––	Age––––	Position––––––––––––––––––––––––––––––––––––––––––––––––––
David Reid	64	Non-executive Chairman
Patrick Cescau	63	Senior Independent Director
Philip Clarke	51	Group Chief Executive
Tim Mason	54	Deputy Group Chief Executive Officer and CMO and CEOFresh & Easy
Richard Brasher	50	Chief Executive Officer – UK & ROI
David Potts	54	Chief Executive Officer – Asia
Andrew Higginson	54	Chief Executive Officer – Retail Services
Laurie McIlwee	49	Chief Financial Officer
Lucy Neville-Rolfe CMG	58	Corporate and Legal Affairs Director
Sir Richard Broadbent	58	Non-executive Director
Gareth Bullock	58	Non-executive Director
Stuart Chambers	55	Non-executive Director
Karen Cook	58	Non-executive Director
Ken Hanna	58	Non-executive Director
Ken Hydon	67	Non-executive Director
Jacqueline Tammenoms Bakker	57	Non-executive Director
Jonathan Lloyd	45	Company Secretary

The business address of the members of our board of directors is Tesco House, Delamare Road, Cheshunt, Hertfordshire, EN8 9SL.

Board Practices

Our board of directors governs through clearly identified board committees to which it delegates certain powers. Our board of directors itself is serviced by the company secretary, who reports to the chairman in respect of his core duties to our board of directors. Our board committees include the executive committee, the audit committee, the remuneration committee and the nominations committee. These committees are properly authorized under our memorandum and articles of association to make decisions and act on behalf of our board of directors within the parameters laid down by our board of directors. Our board of directors is kept fully informed of the work of these committees. Any issues requiring resolution will be referred to the full board of directors.

Executive Committee

Our board of directors delegates responsibility for formulating and implementing the strategic plan and for management of the Group to the Executive Committee. This committee meets two to three times a month and its decisions are communicated throughout the Group on a regular basis. The Executive Committee is composed of the seven executive directors and is chaired by the chief executive. A number of senior executives also attend Executive Committee meetings.

The Executive Committee has authority for decision-making in all areas, with certain exceptions. The Executive Committee is responsible for implementing Group strategy and policy, for monitoring the performance of the business and reporting on these matters in full to the board of directors.

Nominations Committee

The nominations committee leads the process for directors' appointments, re-election and succession of directors and the chairman, and meets as necessary. As of October 11, 2011, the nominations committee was chaired by Mr. Reid, and was composed of Mr. Clarke, Mr. Cescau, Sir Richard Broadbent, Mr. Bullock, Mr. Chambers, Mrs. Cook, Mr. Hanna, Mr. Hydon, and Ms. Bakker.

Remuneration Committee

The remuneration committee's role is to determine and recommend to the board of directors the remuneration of the executive directors. The remunerations committee is composed entirely of independent non-executive directors. As of October 11, 2011, the remuneration committee was chaired by Mr. Chambers, and was composed of Mr. Cescau, Mrs. Cook, Mr. Hanna and Ms. Bakker. The company secretary also attends in his capacity as secretary of the committee.

Audit Committee

The audit committee's primary responsibilities are to review the financial statements, to review the Group's internal control and risk management systems, to consider the appointment of the external auditors, their independence and reports to the audit committee, as well as to review the program of internal audit. The audit committee's annual schedule includes a review of the effectiveness of external and internal audit. Each year the audit committee conducts a review of its own effectiveness and its terms of reference (charter). As of October 11, 2011, the audit committee was chaired by Mr. Hydon, who has recent and relevant financial experience, and was composed of Mr. Cescau, Mr. Bullock, and Mr. Hanna. The company secretary also attends in his capacity as secretary of the audit committee.

Biographical Information

David Reid. Mr. Reid became Non-executive Chairman on April 2, 2004. Prior to his appointment he was Deputy Chairman of Tesco PLC and has served on our board of directors since 1985. Mr. Reid is a Non-executive Director of Reed Elsevier Group PLC and Chairman of both Kwik-Fit Group and Whizz-Kidz. In November 2010 Mr. Reid was appointed one of Prime Minister David Cameron's Business Ambassadors. Mr. Reid will retire as Chairman on November 30, 2011.

Patrick Cescau. Mr. Cescau was appointed a Non-executive Director on February 1, 2009 and became Senior Independent Director in July 2010. He was Group Chief Executive of Unilever from 2005 to January 1, 2009, and prior to this he was Chairman of Unilever plc and Vice Chairman of Unilever NV. He has also been a Non-executive Director of Pearson plc since 2002, becoming Senior Independent Director in April 2010, and IAG (International Consolidated Airlines Group) since September 2010. Mr. Cescau was appointed a Chevalier de la Légion d'honneur in 2005. In June 2009, Mr. Cescau joined the Board of INSEAD.

Philip Clarke. Mr. Clarke was appointed to our board of directors on November 16, 1998. Prior to his appointment as Group CEO in March 2011 he was Asia, Europe and IT Director and has previously held a number of roles in our store operations, commercial and marketing.

Tim Mason. Mr. Mason has been President and Chief Executive Officer, Fresh & Easy Neighborhood Market since January 2006 and became Deputy Group CEO and Chief Marketing Officer in March 2011. He was appointed to our board of directors on February 16, 1995. He joined Tesco in 1982.

Richard Brasher. Mr. Brasher was appointed to our board of directors on March 15, 2004. He joined Tesco in 1986. He has held a number of marketing, commercial and store operations positions, most recently Board Commercial Director, before being appointed UK and ROI CEO in March 2011.

Andrew Higginson. Mr. Higginson was appointed to our board of directors on November 17, 1997. Prior to his appointment as Chief Executive of Retailing Services in July 2008 he was Group Finance and Strategy Director. He is Chairman of Tesco Bank and a Non-executive Director of BSkyB plc.

Laurie McIlwee. Mr. McIlwee was appointed to our board of directors on January 27, 2009. He joined Tesco in 2000 as UK Finance Director and became Distribution Director in 2005. Laurie is a Chartered Management Accountant.

Lucy Neville-Rolfe CMG. Ms. Neville-Rolfe was appointed to our board of directors on December 14, 2006. She joined Tesco in 1997 from the Cabinet Office. She is Deputy Chair of the British Retail Consortium, a Non-executive Director of ITV plc and the Carbon Trust and a member of the China Britain Business Council, the UK India Business Council and the Corporate Leaders Group on Climate Change.

David Potts. Mr. Potts was appointed to our board of directors on November 16, 1998. He joined Tesco in 1973. From 1997 he directed the integration of our businesses in Northern Ireland and the Republic of Ireland before returning to the UK in 2000 as Director responsible for UK Retail Operations. From 2004, Mr. Potts' responsibilities also included the UK Supply Chain and the Republic of Ireland, before being appointed CEO Asia in March 2011.

Sir Richard Broadbent. Sir Richard was appointed Non-executive Director on July 2, 2011 and will become Chairman on November 30, 2011 when David Reid retires. He was Deputy Chairman and Senior Independent Director of Barclays plc until September 30, 2011.

Gareth Bullock. Mr. Bullock was appointed a Non-executive Director on July 3, 2010. He was Group Executive Director of Standard Chartered PLC on his retirement in April 2010. He was also responsible for the Group's risk and special asset management function. He is Senior Independent Director and Chairman of the Remuneration Committee of Spirax-Sarco Engineering Plc.

Stuart Chambers. Mr. Chambers was appointed a Non-executive Director on July 3, 2010. He was Group Chief Executive of NSG Group from 2008 to 2009. Prior to NSG's acquisition of Pilkington plc in 2006, Stuart was Group Chief Executive of Pilkington plc. Previously he held a number of senior roles at Pilkington plc and the Mars Corporation. He is a Non-executive Director of Smiths Group PLC, where he is Chairman of the Remuneration Committee, and of Manchester Airport Group PLC.

Karen Cook. Mrs. Cook was appointed a Non-executive Director on October 1, 2004. She is a Managing Director of Goldman Sachs International and President of Goldman Sachs, Europe. She is also a member of the firm's European Management Committee and Partnership Committee.

Ken Hanna. Mr. Hanna was appointed a Non-executive Director on April 1, 2009. He is Chairman of Inchcape PLC and a Non-executive Director of Aggreko plc. He was previously Chief Financial Officer of Cadbury plc until March 2009 and prior to that an Operating Partner of Compass Partners and CFO and then CEO of Dalgety PLC. He has also been CFO of United Distillers and Avis Europe plc.

Ken Hydon. Mr. Hydon was appointed a Non-executive Director on February 23, 2004 and is Chairman of the Audit Committee. He is also a Non-executive Director of Reckitt Benckiser plc, The Royal Berkshire NHS Foundation Trust and Pearson plc.

Jacqueline Tammenoms Bakker. Ms. Bakker was appointed a Non-executive Director on January 1, 2009. She was a Director General at the Ministry of Transport in the Netherlands from 2001 to 2007 and has held senior positions at Quest International, McKinsey & Co and Shell. Ms. Bakker is a Nonexecutive Director of Vivendi and was appointed a Chevalier de la Légion d'honneur in 2006.

Jonathan Lloyd. Mr. Lloyd was appointed Company Secretary to our board of directors on 14 December 2006. He joined Tesco as Deputy Company Secretary and Corporate Secretariat Director in April 2005 from Freshfields Bruckhaus Deringer LLP. Mr. Lloyd is also Company Secretary of Tesco Bank.

Compensation

In the 52 weeks end February 26, 2011, the aggregate remuneration in the form of salaries, bonuses and other amounts we paid to the members of our board of directors was £21.8 million.

Interests of Directors

As of November 16, 2011 (being the latest practicable date prior to the publication of this document) there were no outstanding transactions other than in the ordinary course of business undertaken by us in which our directors were interested parties. Certain of our directors have direct or beneficial interests in our ordinary shares. See "Principal Shareholders".

Conflicts of Interests

None of the members of our management or board of directors have been subject to any bankruptcy, receivership or liquidation proceedings, nor have any of them been convicted of any fraudulent offense or been subject to any official public incrimination or sanctions by statutory or regulatory authorities (including designated professional bodies) in acting as founder, director or senior manager of any company for the last five years, nor has any of them been disqualified by a court from acting as a member of the management or supervisory bodies of an issuer or from acting in the management or conduct of the affairs of any issuer for the last five years.

Except as described in the next paragraph, there are no potential conflicts of interest between the private interests or other duties of the directors of the Issuer and their duties to the Issuer.

All of the Non-Executive Directors and all of the Executive Directors, other than R.W. Brasher, P.A Clarke, T.J.R. Mason, L.P. McIlwee and D.T.Potts, are also directors of companies with which a member of the Tesco PLC Group has or may have a business relationship and, as a result, may have potential conflicts of interest between their duties to the Company and their duties to the companies of which they are directors. For example, a potential conflict of interest could arise if a Director is called upon to vote in relation to a transaction between Tesco and a company of which he or she is a director. The Board of Directors monitors potential and actual conflicts of interest and has processes to deal with them. Directors of the Company are required to disclose potential and actual conflicts of interest to the Board and the Board addresses potential and actual conflicts in accordance with legal requirements.

As a matter of English law, each director of the Issuer is under a duty to act honestly and in good faith with regard to the best interests of the Issuer, regardless of any other directorships such director may hold.

PRINCIPAL SHAREHOLDERS

Share Capital

As of October 31, 2011 (being the latest practicable date prior to the publication of this document), we had an issued share capital of £400,853,979 comprised of 8,017,079,584 ordinary shares with a par value of 5p per share.

Shareholders

As at October 31, 2011 (being the latest practicable date prior to the publication of this document), notifications had been received of the following interests in 3% or more of the Company's issued ordinary share capital:

۰..,×۰,
---------------------

Name	Percent
	Ownership
Blackrock, Inc. (via its funds)	––––––––––5.48%
Legal & General Investment Management Limited	3.99%
Berkshire Hathaway Inc. (via its funds)	3.02%
Directors as a group(1)	0.15%
Total	––––––––––12.64%––––––––––

(1) Directors' holdings include ordinary share holdings and ordinary shares, options and unfunded promises held under company share plans as of October 31, 2011 and which were available or exercisable as of the same date.

DESCRIPTION OF THE NOTES

The following is a summary of the material provisions of the notes and the Fiscal and Paying Agency Agreements (as described below). Copies of the Fiscal and Paying Agency Agreements will be available for inspection during normal business hours at any time after the closing date of the offering of the notes at the offices of the Agent (as defined below) at the address below. Any capitalized term used herein but not defined shall have the meaning assigned to such term in the Fiscal and Paying Agency Agreements.

General

The $500,000,000 2.000% Senior Notes due 2014 (the "2014 notes") and the $500,000,000 2.700% Senior Notes due 2017 (the "2017 notes" and, together with the 2014 Notes, the "notes") will be issued in and treated as two separate series of debt securities under, in each case, a Fiscal and Paying Agency Agreement, each such agreement expected to be dated as of December 5, 2011 (together, such Fiscal and Paying Agency Agreements in respect of each of the 2014 notes and the 2017 notes, the "FPAA"), in each case between Tesco PLC (the "Issuer") and Citibank, N.A., London Branch, as fiscal agent, paying agent, transfer agent and registrar (in each and all such capacities, the "Agent"), Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. The FPAA will not be qualified under the US Trust Indenture Act of 1939, as amended. Consequently, the Holders of notes generally will not be entitled to the protections provided under such Act to holders of debt securities issued under a qualified indenture, including those requiring a trustee to resign in the event of certain conflicts of interest and to inform the Holders of notes of certain relationships between it and the Issuer. In this "Description of the Notes", the terms "Holder", "Noteholder" and other similar terms refer to a "registered holder" of notes, and not to a beneficial owner of a book-entry interest in any notes, unless the context otherwise clearly requires.

The Initial Purchasers propose to resell the Rule 144A notes in registered form to certain institutions in the United States in reliance upon Rule 144A under the Securities Act. The Rule 144A notes may not be sold or otherwise transferred except, in the United States, pursuant to registration under the Securities Act or in accordance with Rule 144A or, outside the United States, pursuant to Rule 904 of Regulation S thereunder or, in either case, in a resale transaction that is otherwise exempt from such registration requirements, and each global note representing Rule 144A notes (a "Rule 144A global note") will bear a legend to this effect. The Agent will not be required to accept for registration or transfer any Rule 144A global notes, except upon presentation of satisfactory evidence (which may include legal opinions) that the restrictions on transfer have been complied with, all in accordance with such reasonable regulations as the Issuer may from time to time agree with such Agent.

For so long as any notes remain outstanding, the Issuer will, during any period in which it is neither subject to Section 13 or 15(d) of the US Securities Exchange Act of 1934, as amended (the "Exchange Act") nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, make available to any registered Holder of notes (or any Holder of a book-entry interest in such notes designated by the registered holder thereof) in connection with any sale thereof and to any prospective purchaser of notes or a book-entry interest in notes designated by such registered holder, in each case upon request of such registered holder, the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the Securities Act. As of the date of this document the Issuer is exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act.

The Regulation S notes will be resold outside the United States in offshore transactions in reliance on Regulation S under the Securities Act.

Principal, Maturity and Interest

The notes will be unsecured and unsubordinated obligations of the Issuer. The 2014 notes and the 2017 notes are initially issuable in aggregate principal amounts not to exceed $500,000,000 and $500,000,000, respectively, and will mature on December 5, 2014 and January 5, 2017, respectively. The 2014 notes will bear interest at 2.000% per annum from the date of the initial issuance of such notes or from the most recent interest payment date to which interest has been paid or provided for, payable semiannually in arrears on June 5 and December 5, commencing June 5, 2012 (each, an "interest payment date") to the person in whose name any such 2014 note, as applicable, is registered at the close of business on May 20 or November 20 (whether or not a business day) immediately preceding such interest payment date (each, a "record date"), and the 2017 notes will bear interest at 2.700%, per annum from the date of the initial issuance of such notes or from the most recent interest payment date to which interest has been paid or provided for, payable semi-annually in arrears on January 5 and July 5, commencing July 5, 2012 (each, an "interest payment date") to the person in whose name any such 2017 note, as applicable, is registered at the close of business on June 20 or December 20 (whether or not a business day) immediately preceding such interest payment date (each, a "record date"), in each case, notwithstanding any transfer or exchange of such notes subsequent to the record date and prior to such interest payment date, except that, if and to the extent the Issuer shall default in the payment of the interest due on such interest payment date and the applicable grace period shall have expired, such defaulted interest may at the option of the Issuer be paid to the persons in whose names notes are registered at the close of business on a subsequent record date (which shall not be less than ten days prior to the date of payment of such defaulted interest) established by notice given by mail by or on behalf of the Issuer to the Holders (which term means registered holders) of the 2014 notes or the 2017 notes, as applicable, not less than 15 days preceding such subsequent record date. Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months, the number of days elapsed. If the date on which any interest payment or principal payment is to be made is not a business day in New York City, London, England, and the place of payment of such interest or principal, such payment will be made on the next day which is a business day in New York City, London, England and the place of payment of such interest or principal without any further interest or other amounts being paid or payable in connection therewith. As long as the notes are outstanding and admitted to trading on the Regulated Market, the Issuer will maintain in London, England an office or agency for the payment of principal of and interest on the notes, which will be the place of payment of principal and interest on the notes. If any note is exchanged in whole or in part for notes in definitive registered form as described in "Book-Entry; Delivery and Form—Transfers or Exchanges from Global Notes to Definitive Notes", the Issuer will also maintain an office or agency in New York City for the payment of principal of and interest on such notes in definitive registered form so long as any such notes are outstanding.

Form and Denomination

The notes will be issued in fully registered form and only in denominations of $200,000 and integral multiples of $1,000 in excess thereof. The notes will be issued initially as global notes.

Further Issues

The Issuer may, from time to time, without notice to or the consent of the Holders of the notes, "reopen" each series of notes and create and issue additional notes having identical terms and conditions as the 2014 notes or the 2017 notes, as the case may be (or in all respects except for the issue date, issue price, payment of interest accruing prior to the issue date of such additional notes and/or the first payment of interest following the issue date of such additional notes) so that the additional notes are consolidated and form a single series of notes with the 2014 notes or the 2017 notes, as the case may be.

The Issuer will not issue any additional notes unless such additional notes have no more than a de minimis amount of original issue discount or such issuance would constitute a "qualified reopening" for US federal income tax purposes.

Status of the notes

The notes will be unsecured and unsubordinated obligations of the Issuer and will rank pari passu in right of payment among themselves and with all other unsecured and unsubordinated indebtedness of the Issuer (save for certain obligations required to be preferred by law).

Payment of Additional Amounts

The Issuer will make payments of, or in respect of, principal, any premium and interest on the notes without withholding or deduction for or on account of any present or future tax, levy, impost or other governmental charge whatsoever imposed, assessed, levied or collected ("Taxes") by or on behalf of the United Kingdom or any political subdivision thereof or any authority thereof having the power to tax (a "UK Taxing Jurisdiction"), unless such withholding or deduction is required by law.

If the Issuer is required by a UK Taxing Jurisdiction to deduct or withhold Taxes, the Issuer will pay to a Holder of a note such additional amounts ("Additional Amounts") as may be necessary so that the net amount received by such Holder will equal the amount such Holder would have received if such Taxes had not been withheld or deducted; provided, however, that the Issuer shall not be required to pay any Additional Amounts for or on account of:

(i) Any Taxes that would not have been so imposed, assessed, levied or collected but for the fact that the Holder or beneficial owner of the applicable note (or a fiduciary, settlor, beneficiary, member or shareholder of, or possessor of a power over, such Holder, if such Holder is an estate, trust, partnership or corporation) is or has been a domiciliary, national or resident of, or engaging or having been engaged in a trade or business or maintaining or having maintained a permanent establishment or being or having been physically present in, a UK Taxing Jurisdiction or otherwise having or having had some connection with a UK Taxing Jurisdiction other than the mere holding or ownership of, or the collection of principal of, and interest on, a note;
(ii) Any Taxes that would not have been so imposed, assessed, levied or collected but for the fact that, where presentation is required in order to receive payment, the applicable note was presented more than 30 days after the date on which such payment became due and payable or was provided for, whichever is later, except to the extent that the Holder or beneficial owner thereof would have been entitled to Additional Amounts had the applicable note been presented for payment on the last day of such 30 day period;
(iii) Any estate, inheritance, gift, sales, transfer, personal property or similar Taxes;
(iv) Any Taxes that are payable otherwise than by deduction or withholding from payments on or in respect of the applicable note;
(v) Any Taxes that would not have been so imposed, assessed, levied or collected but for the failure by the Holder or the beneficial owner of the applicable note to comply with a written request addressed to the Holders to provide any declaration of non-residence or other similar declarations or certifications required by the laws or administrative practice of a UK Taxing Jurisdiction as a condition to relief or exemption from such taxes;
(vi) Any withholding or deduction imposed on a payment to or for the benefit of an individual that is required to be made pursuant to EU Council Directive 2003/48/EC or any other Directive on the taxation of savings implementing the conclusion of the ECOFIN council meeting of November 26-27, 2000, or any law implementing or complying with, or introduced in order to conform to, such Directive;
(vii) Any withholding or deduction that is imposed on the applicable note that is presented for payment, where presentation is required, by or on behalf of a Holder who would have been able to avoid such withholding or deduction by presenting such note to another paying agent in a member state of the EU; or
(viii) Any combination of the Taxes described in (i) through (vii) above.

In addition, Additional Amounts will not be paid in respect of any payment in respect of the applicable notes to any Holder of the applicable notes that is a fiduciary, a partnership, a limited liability company or any person other than the sole beneficial owner of such payment to the extent such payment would be required by the laws of a UK Taxing Jurisdiction to be included in the income for tax purposes of a beneficiary or settlor with respect to such fiduciary, a member of such partnership, an interest holder in such limited liability company or a beneficial owner that would not have been entitled to such amounts had such beneficiary, settlor, member, interest holder or beneficial owner been the Holder of such notes.

Unless otherwise stated, references in any context to the payment of principal of, and any premium or interest on, any Note, will be deemed to include payment of Additional Amounts to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof. References in this section to the Issuer will be deemed to include any successor person.

Redemption

Optional Redemption

The Issuer may redeem the applicable notes in whole or in part, at the Issuer's option, at any time and from time to time at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed and (ii) as determined by the Independent Investment Banker, the sum of the present values of the applicable Remaining Scheduled Payments discounted to the date of redemption (the "redemption date") on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus, in the case of the 2014 notes 25 basis points, and, in the case of the 2017 notes, 30 basis points, together with, in each case, accrued and unpaid interest on the principal amount of the notes to be redeemed to the redemption date. In connection with such optional redemption the following defined terms apply:

"Treasury Rate" means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity (computed as of the third business day immediately preceding that redemption date) or interpolated (on a day count basis) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for that redemption date.
"Comparable Treasury Issue" means the United States Treasury security or securities selected by the Independent Investment Banker as having an actual or interpolated maturity comparable to the remaining term of the notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the 2014 notes or the 2017 notes, as the case may be.
"Comparable Treasury Price" means, with respect to any redemption date, (A) the average of the Reference Treasury Dealer Quotations for that redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations or (B) if the Independent Investment Banker for the notes obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Quotations.
"Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Issuer to act as the "Independent Investment Banker".
"Reference Treasury Dealer" means each of Barclays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, their respective successors and two other nationally recognized investment banking firms that are Primary Treasury Dealers specified from time to time by the Issuer; provided, however, that if any of the foregoing shall cease to be a primary US Government securities dealer in New York City (a "Primary Treasury Dealer"), the Issuer shall substitute therefor another nationally recognized investment banking firm that is a Primary Treasury Dealer.
"Reference Treasury Dealer Quotation" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Independent Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Independent Investment Banker by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the third business day preceding that redemption date.
"Remaining Scheduled Payments" means, with respect to each note to be redeemed, the remaining scheduled payments of the principal thereof and interest thereon that would be due after the related redemption date but for such redemption; provided, however, that if that redemption date is not an interest payment date with respect to such notes, the amount of the next succeeding scheduled interest payment thereon will be reduced by the amount of interest accrued thereon to that redemption date.

Notice of any optional redemption will be given in accordance with "Notice" below at least 30 days but not more than 60 days before the redemption date to each Holder of the notes to be redeemed.

Repurchase Upon a Change of Control Offer

If a Change of Control Triggering Event occurs, unless the Issuer has exercised its option to redeem the applicable notes in full as described above or the notes have been redeemed in full for tax reasons as described below, the Issuer will be required to make an offer (the "Change of Control Offer") to each Holder of the applicable notes to repurchase all or any part (with any residual equal to $200,000 or an integral multiple of $1,000 in excess thereof) of that Holder's applicable notes on the terms set forth in the notes. In the Change of Control Offer, the Issuer will be required to offer payment in cash equal to 101% of the aggregate principal amount of applicable notes repurchased, plus accrued and unpaid interest, if any, on the applicable notes repurchased to the date of repurchase (the "Change of Control Payment"). Within 30 days following any Change of Control Payment Triggering Event or, at the Issuer's option, prior to any Change of Control, but after public announcement of the transaction that constitutes or may constitute the Change of Control, a notice will be mailed to Holders of the notes describing the transaction that constitutes or may constitute the Change of Control Payment Triggering Event and offering to repurchase the applicable notes on the date specified in the notice, which date will be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"). The notice will, if mailed prior to the date of consummation of the Change of Control, state that the offer to purchase

is conditioned on the Change of Control Payment Triggering Event occurring on or prior to the Change of Control Payment Date.

On the Change of Control Payment Date, the Issuer will, to the extent lawful:

accept for payment all applicable notes or portions of applicable notes properly tendered pursuant to the Change of Control Offer;
deposit with the paying agent an amount equal to the Change of Control Payment in respect of all applicable notes or portions of applicable notes properly tendered; and
deliver or cause to be delivered to the Agent the applicable notes properly accepted together with an officers' certificate stating the aggregate principal amount of applicable notes or portions of applicable notes being repurchased.

The Issuer will not be required to make a Change of Control Offer upon the occurrence of a Change of Control Payment Triggering Event if a third party makes such an offer in the manner, at the times and otherwise in compliance with the requirements for an offer made by the Issuer and the third party repurchases all notes properly tendered and not withdrawn under its offer. In addition, the Issuer will not repurchase any notes if there has occurred and is continuing on the Change of Control Payment Date an Event of Default under the applicable notes (as defined below under "Events of Default"), other than a default in the payment of the Change of Control Payment upon a Change of Control Payment Triggering Event.

The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act, and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the applicable notes as a result of a Change of Control Payment Triggering Event. To the extent that the provisions of any such securities laws or regulations conflict with the Change of Control Offer provisions of the notes, the Issuer will comply with those securities laws and regulations and will not be deemed to have breached the Issuer's obligations under the Change of Control Offer provisions of the notes by virtue of any such conflict.

For purposes of the Change of Control Offer provisions of the notes, the following terms will be applicable:

• "Change of Control" means the occurrence of any of the following: (1) the consummation of any transaction (including, without limitation, any merger, consolidation, amalgamation or other combination) the result of which is that any "person" (as that term is used in Section 13(d)(3) of the Exchange Act) (other than the Issuer or one of its Subsidiaries) becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the Issuer's voting stock or other voting stock into which the Issuer's voting stock is reclassified, consolidated, exchanged or changed, measured by voting power rather than number of shares; (2) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger, consolidation, amalgamation or other combination), in one or more series of related transactions, of all or substantially all of the Issuer's assets and the assets of the Issuer's Subsidiaries, taken as a whole, to one or more "persons" (as that term is used in Section 13(d)(3) of the Exchange Act) (other than the Issuer or one of its Subsidiaries); or (3) the first day on which a majority of the members of the Issuer's board of directors are not continuing directors. Notwithstanding the foregoing, a transaction will not be deemed to involve a change of control if (1) the Issuer becomes a direct or indirect wholly-owned subsidiary of a holding company and (2)(A) the direct or indirect holders of the voting stock of such holding company immediately following that transaction are substantially the same as the holders of the Issuer's voting stock immediately

prior to that transaction or (B) immediately following that transaction no person (other than a holding company satisfying the requirements of this sentence) is the beneficial owner, directly or indirectly, of more than 50% of the voting stock of such holding company. Although there is a limited body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, in certain circumstances there may be a degree of uncertainty as to whether a particular transaction would involve a disposition of "all or substantially all" of the Issuer's assets. As a result, it may be unclear as to whether a Change of Control has occurred and whether a Holder of a note may require the Issuer to make an offer to repurchase the notes as described above.

"Change of Control Triggering Event" means the occurrence of both a Change of Control and a Rating Event in respect of that Change of Control.
"Continuing directors" means, as of any date of determination, any member of the Issuer's board of directors who (1) was a member of such board of directors on the date the notes were issued; or (2) was nominated for election, elected or appointed to such board of directors with the approval of a majority of the continuing directors who were members of such board of directors at the time of such nomination, election or appointment (either by a specific vote or by approval of the Issuer's notice of annual general meeting in which such member was named as a nominee for election as a director, without objection to such nomination).
"Fitch" means Fitch Ratings Ltd.
"Investment grade rating" means a rating equal to or higher than BBB− (or the equivalent) by Fitch, Baa3 (or the equivalent) by Moody's and BBB− (or the equivalent) by S&P, or the equivalent investment grade credit rating from any replacement rating agency or rating agencies selected by us.
"Moody's" means Moody's Investors Service, Inc.
"Rating agencies" means (1) each of Fitch, Moody's and S&P; and (2) if any of Fitch, Moody's or S&P ceases to rate the notes or fails to make a rating of the notes publicly available for reasons outside of the Issuer's control, a "nationally recognized statistical rating organization" within the meaning of Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act selected by the Issuer (as certified by a resolution of the Issuer's board of directors) as a replacement agency for Fitch, Moody's or S&P, or all of them, as the case may be.
"Rating Event" means the rating on the 2014 notes or the 2017 notes, as applicable, is lowered by each of the rating agencies, and the applicable notes are rated below an investment grade rating by each of the rating agencies, on any day within the 60-day period (which 60-day period will be extended so long as the rating of the applicable notes is under publicly announced consideration for a possible downgrade by any of the rating agencies) after the earlier of (1) the occurrence of a Change of Control; and (2) public notice of the occurrence of a Change of Control or the Issuer's intention to effect a Change of Control; provided, however, that a Rating Event otherwise arising by virtue of a particular reduction in rating will not be deemed to have occurred in respect of a particular Change of Control (and thus will not be deemed a Rating Event for purposes of the definition of Change of Control Payment Triggering Event) if the rating agencies making the reduction in rating to which this definition would otherwise apply do not announce or publicly confirm or inform the Agent in writing at the Issuer's or its request that the reduction was the result, in whole or in part, of any event or circumstance comprised of or arising as a result of, or in respect of, the

applicable Change of Control (whether or not the applicable Change of Control has occurred at the time of the Rating Event).

"S&P" means Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc.
"Voting stock" means, with respect to any specified "person" (as that term is used in Section 13(d)(3) of the Exchange Act) as of any date, the capital stock of such person that is at the time entitled to vote generally in the election of the board of directors of such person.

Redemption for Tax Reasons

Each series of notes is also redeemable by the Issuer, in whole but not in part, at 100% of the principal amount of such notes plus accrued and unpaid interest to the applicable redemption date (including any Additional Amounts) at the Issuer's option at any time prior to their maturity if due to a Change in Tax Law (as defined below) (i) the Issuer, in accordance with the terms of the applicable notes, has, or would, become obligated to pay any Additional Amounts to the Holders of notes of that series; and (ii) such obligation cannot be avoided by the Issuer taking reasonable measures available to it. In such case, the Issuer may redeem the applicable notes as a whole, but not in part, upon not less than 30 nor more than 60 days' notice as provided in "Notice" below; provided that, (a) no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer would be obligated to pay any such Additional Amounts were a payment in respect of the applicable notes then due and (b) at the time such notice is given, such obligation to pay such Additional Amounts remains in effect. The Issuer's right to redeem the applicable notes shall continue as long as the Issuer is obligated to pay such Additional Amounts, notwithstanding that the Issuer shall have made payments of Additional Amounts.

Prior to the giving of any such notice of redemption, the Issuer shall deliver to the Agent (1) a certificate stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Issuer so to redeem have occurred and (2) an opinion of independent counsel of recognized standing selected by the Issuer to the effect that the Issuer has, or would, become obligated to pay such Additional Amounts as a result of such change or amendment.

For purposes hereof, "Change in Tax Law" shall mean (i) any changes in, or amendment to, any law of a UK Taxing Jurisdiction (including any regulations or rulings promulgated thereunder) or any amendment to or change in the application or official interpretation (including judicial or administrative interpretation) of such law, which change or amendment becomes effective on or after November 28, 2011 or (ii) if the Issuer consolidates, merges, amalgamates or combines with, or transfers or leases its assets substantially as an entirety to, any person that is incorporated or tax resident under the laws of any jurisdiction other than a UK Taxing Jurisdiction and as a consequence thereof such person becomes the successor obligor to the Issuer in respect of Additional Amounts that may become payable (in which case, for purposes of this redemption provision, all references to the Issuer shall be deemed to be and include references to such person), any change in, or amendment to, any law of the jurisdiction of incorporation, or any political subdivision thereof or any authority thereof having the power to tax, of such person or any successor entity (including any regulations or rulings promulgated thereunder) or any amendment to or change in the application or official interpretation (including judicial or administrative interpretation) of such law, which change or amendment becomes effective on or after the date of such consolidation, merger, amalgamation, combination or other transaction.

General

Upon presentation of any note redeemed in part only, the Issuer will execute and the Agent will authenticate and deliver to or on the order of the Holder thereof, at the expense of the Issuer, a new note or notes, of authorized denominations, in principal amount equal to the unredeemed portion of the note so presented.

On or before any redemption date, the Issuer shall deposit with the Agent money sufficient to pay the redemption price of and accrued interest on the notes to be redeemed on such date. If less than all the notes are to be redeemed, the notes to be redeemed shall be selected by the Agent by such method as the Agent shall deem fair and appropriate and is consistent with the rules of DTC. The redemption price shall be calculated by the Independent Investment Banker and the Issuer, and the Agent shall be entitled to rely on such calculation.

On and after any redemption date, interest will cease to accrue on the notes or any portion thereof called for redemption.

Final Redemption

Unless previously purchased or redeemed by the Issuer or any of its Subsidiaries, and cancelled, the principal amount of the 2014 notes and the 2017 notes will mature and become due and payable on December 5, 2014 and January 5, 2017, respectively, in an amount equal, in each case, to their principal amount, with accrued and unpaid interest to such date.

Reacquisition

There is no restriction on the ability of the Issuer or any of its Subsidiaries to purchase or repurchase notes, provided that any notes so repurchased shall be cancelled and not reissued.

Certain Definitions

Set forth below is a summary of certain of the defined terms used in the notes and the FPAA. You should refer to the FPAA for the full definition of all defined terms.

"Material Subsidiary" means a Subsidiary of the Issuer whose profits before tax and extraordinary items or whose net assets (in each case attributable to the Issuer) calculated by reference to its latest audited accounts represent ten per cent or more of the consolidated profits before tax and extraordinary items or net assets (in each case attributable to the Issuer), as the case may be, of the Issuer and its Subsidiaries similarly calculated. A certificate of any two directors of the Issuer that in their opinion a Subsidiary is or is not or was or was not at any particular time a Material Subsidiary shall, in the absence of manifest error, be conclusive and binding on all parties.
"Obligation" means any present or future indebtedness evidenced by notes, bonds, debentures (as defined in Section 738 of the Companies Act 2006) or other securities which, except where it is the intention of the Issuer or the relevant Subsidiary that such securities will not be so quoted or traded, are, at the request or with the concurrence of the Issuer or such Subsidiary, quoted or traded for the time being on any stock exchange or other generally recognized market for securities, excluding any secured loan stock listed on the Official List denominated or payable in Sterling and initially distributed primarily to investors in the United Kingdom.
"Sterling" and "£" means the currency of the United Kingdom.

• "Subsidiary" means a subsidiary within the meaning of Section 1159 of the Companies Act of 2006.

Covenants of the Issuer

So long as any of the notes remain outstanding neither the Issuer nor any of its Subsidiaries will create any mortgage, charge, pledge, lien or other security interest on any of its present or future undertaking or assets or enter into any arrangement, the practical effect of which is to grant similar security, in either case in respect of (i) any Obligation of the Issuer or any other person or (ii) any guarantee or indemnity in respect of any Obligation of the Issuer or any other person, without at the same time securing the notes and all amounts payable under the applicable FPAA equally and ratably therewith to the satisfaction of the Agent or providing such other security therefor which the Agent in its absolute discretion shall deem not materially less beneficial to the noteholders or as shall be approved by Holders of a majority of the principal amount of the relevant notes.

The FPAA and the notes do not contain any restrictions on the ability of the Issuer or its Subsidiaries (i) to secure indebtedness other than Obligations or (ii) to enter into sale and leaseback transactions.

The notes will not specifically prohibit the Issuer from entering into a merger, consolidation or similar combination with or into another party, or transferring all or substantially all of its assets to another party, whether or not the other party becomes liable for the Issuer's obligations under the notes. Such a transaction may, however, constitute a Change of Control described under "—Repurchase Upon A Change of Control Offer" above or an Event of Default under clause (vi) under "—Events of Default" below.

The notes will not contain covenants or other provisions to afford protection to the Holders in the event of a highly leveraged transaction or a change in control of the Issuer except as provided above.

Events of Default

The following will be Events of Default (each an "Event of Default") with respect to the applicable notes:

(i) default in the payment of any installment of interest (excluding Additional Amounts) upon any applicable note as and when the same shall become due and payable, and continuance of such default for 30 days; or
(ii) default in the payment of the applicable Additional Amounts as and when the same shall become due and payable, and continuance of such default for a period of 30 business days; or
(iii) default in the payment of all or any part of the principal of any applicable note as and when the same shall become due and payable either at maturity, upon any redemption, by declaration or otherwise and continuance of such default for two business days; or
(iv) default in the performance or breach of any covenant or warranty of the Issuer in respect of the applicable notes or applicable FPAA (other than those described in paragraphs (i), (ii) and (iii) above), and continuance of such default or breach for a period of 60 days after there has been given a written notice, by registered or certified mail, to the Issuer by the Agent or to the Issuer and the Agent by the Holders of at least 25% in principal amount of the outstanding notes affected thereby, specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" under the notes; or
(v) any indebtedness for borrowed money having an aggregate outstanding principal amount of at least £25,000,000 (or its equivalent in any other currency or currencies at the date declared due) of the Issuer or any Material Subsidiary shall be or be declared due and payable prior to the date on which the same would otherwise become due and payable by reason of the occurrence of an event of default (howsoever described) in relation thereto or the Issuer or any Material Subsidiary defaults in the repayment of any indebtedness for borrowed money having an aggregate outstanding principal amount of at least £25,000,000 (or its equivalent in any other currency or currencies at the date of maturity) at the maturity thereof or at the expiry of any applicable grace period or any guarantee of any such indebtedness given by the Issuer or any Material Subsidiary shall not be paid when due and called upon save in any such case where there is a bona fide dispute as to whether payment or repayment is due; or
(vi) the Issuer or any Material Subsidiary stops or threatens to stop payment generally or ceases or threatens to cease to carry on its business or a substantial part of its business (except, in the case of a Material Subsidiary, a cessation or threatened cessation for the purpose of a reconstruction or amalgamation the terms of which have previously been approved in writing by a majority of the Holders, or in connection with the transfer of all or the major part of the business, undertaking and assets of such Material Subsidiary to the Issuer or a subsidiary of the Issuer); or
(vii) an encumbrancer takes possession or an administrative or other receiver is appointed of the whole or any material part of the undertaking or assets of the Issuer or any Material Subsidiary or a distress, execution or similar proceeding is levied or enforced upon or sued out against any of the chattels or property of the Issuer or any Material Subsidiary and is not discharged within 21 days; or
(viii) the Issuer or any Material Subsidiary is deemed unable to pay its debts within the meaning of Section 123(1)(b), (c) or (d) of the Insolvency Act 1986, or the Issuer or any Material Subsidiary becomes unable to pay its debts as they fall due or the value of its assets falls to less than the amount of its liabilities (taking into account for both these purposes its contingent and prospective liabilities) or the Issuer or any Material Subsidiary otherwise becomes insolvent, or the Issuer or any Material Subsidiary suspends making payments (whether principal or interest) with respect to all or any class of its debts or announces an intention to do so or if an administration order in relation to the Issuer or any Material Subsidiary is made; or
(ix) an order is made or an effective resolution passed for the winding up of the Issuer or any kind of composition, scheme of arrangement, compromise or other similar arrangement involving the Issuer or any Material Subsidiary and the creditors of them generally (or any class of such creditors) is entered into or made.

The notes will provide that if an Event of Default occurs and is continuing, then and in each and every such case, unless the principal of all the applicable notes shall have already become due and payable, the Holders of not less than 25% in aggregate principal amount of the applicable notes then outstanding, by notice in writing to the Issuer and to the Agent, may declare the entire principal amount of all applicable notes issued pursuant to the applicable FPAA, and interest accrued and unpaid thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable, without any further declaration or other act on the part of any Holder. Under certain circumstances, the Holders of a majority in aggregate principal amount of the applicable notes then outstanding, by written notice to the Issuer and the Agent, may waive defaults and rescind and annul declarations of acceleration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impart any right consequent thereon.

The Holders of a majority in aggregate principal amount of the applicable notes then outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Agent, or exercising any trust or power conferred on the Agent, subject to certain limitations to be specified in the FPAA.

An Event of Default with respect to the 2014 notes would not necessarily constitute an event of default with respect to the 2017 notes.

The FPAA will also provide that the Issuer will furnish to the Agent on or before June 30 in each year (commencing on June 30, 2012), if any notes are then outstanding, a certificate from an officer as to his or her knowledge of the Issuer's compliance with all conditions and covenants under the FPAA, which certificate may merely state that such officer has no knowledge of any default.

Defeasance

The notes will provide that the Issuer will have the option either (a) to be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the applicable notes and to have satisfied all the obligations under the applicable notes relating to the applicable notes (except for certain obligations, including those relating to the defeasance trust and obligations to register the transfer or exchange of notes, to replace mutilated, destroyed, lost or stolen notes, to pay Additional Amounts and to maintain paying agencies) on the 91st day after the applicable conditions described below have been satisfied or (b) to cease to be under any obligation to comply with the covenants described above under "Negative Pledge" under the applicable notes, and non-compliance with such covenants and the occurrence of certain events described above under "Events of Default" will not give rise to any Event of Default under the applicable notes, at any time after the applicable conditions described below have been satisfied.

In order to exercise either defeasance option, the Issuer must deposit with the Agent, irrevocably in trust, money or US Government Obligations (as defined in the notes) for the payment of principal of and interest on the outstanding applicable notes to and including the redemption date irrevocably designated by the Issuer on or prior to the date of deposit of such money or US Government Obligations, and must comply with certain other conditions, including delivering to the Agent an opinion of US counsel to the effect that US beneficial owners of the applicable notes that are US persons for US federal income tax purposes (x) will not recognize income, gain or loss for US federal income tax purposes as a result of the exercise of such option and (y) will be subject to US federal income tax on the same amount and in the same manner and at the same time as would have been the case if such option had not been exercised, which opinion, in the case of (a) above, is based on either (i) a change in applicable US federal income tax law since the date of this document or (ii) a ruling received from or published by the United States Internal Revenue Service.

Modification and Waiver

Without Consent of Noteholders

Each FPAA will contain provisions permitting the Issuer, without the consent of the Holders of any of the applicable notes at any time outstanding, from time to time and at any time, to enter into a fiscal and paying agency agreement or fiscal and paying agency agreements supplemental thereto:

• to convey, transfer, assign, mortgage or pledge to the Agent as security for the applicable notes any property or assets;

to evidence the succession of another person to the Issuer, or successive successions, and the assumption by the successor person of the covenants, agreements and obligations of the Issuer, pursuant to the FPAA;
to evidence and provide for the acceptance of appointment of a successor or successors to the Agent in any of its capacities;
to add to the covenants of the Issuer, such further covenants, restrictions, conditions or provisions as the Issuer shall consider to be for the protection of the Holders of the applicable notes, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default under the notes permitting the enforcement of all or any of the several remedies provided in the applicable FPAA; provided that, in respect of any such additional covenant, restriction, condition or provision, such supplemental FPAA may provide for a particular period of grace after default (which may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such an Event of Default or may limit the right of Holders of a majority in aggregate principal amount of the applicable notes to waive such an Event of Default;
to modify the restrictions on, and procedures for, resale and other transfers of the applicable notes pursuant to law, regulation or practice relating to the resale or transfer of restricted securities generally;
to cure any ambiguity or to correct or supplement any provision contained in the FPAA which may be defective or inconsistent with any other provision contained therein or to make such other provision in regard to matters or questions arising under the applicable notes as the Issuer may deem necessary or desirable and which will not adversely affect the interests of the Holders of the applicable notes in any material respect; and
to "reopen" the applicable series of notes in accordance with the terms of the applicable notes and create and issue additional notes having identical terms and conditions as the applicable notes (or in all respects except for the issue date, issue price, payment of interest accruing prior to the issue date of such additional notes and/or the first payment of interest following the issue date of such additional notes) so that the additional notes are consolidated and form a single series with the outstanding applicable notes.

With Consent of Noteholders

The FPAA will contain provisions permitting the Issuer and the Agent, with the consent of the Holders of not less than a majority in aggregate principal amount of the applicable notes at the time outstanding (including consents obtained in connection with a tender offer or exchange offer for the applicable notes), from time to time and at any time, to enter into a fiscal and paying agency agreement or fiscal and paying agency agreements supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the applicable notes or of modifying in any manner the rights of the Holders of the applicable notes, provided that no such fiscal and paying agency agreement may, without the consent of the Holder of each of the notes so affected:

change the stated maturity of the applicable note of, or the date for payment of any principal of, or installment of interest on, any note; or
reduce the principal amount of or the rate or amount of interest on any note or Additional Amounts payable with respect thereto or reduce the amount payable thereon in the event of redemption or default; or
change the place or currency of payment of principal of or interest on any applicable note or Additional Amounts payable with respect thereto; or
change the obligation of the Issuer to pay Additional Amounts (except as otherwise permitted by such applicable note); or
impair the right to institute suit for the enforcement of any such payment on or with respect to any applicable note; or
reduce the percentage of the aggregate principal amount of the applicable notes outstanding, the consent of whose Holders is required for any such supplemental fiscal and paying agency agreement;

provided that no consent of any Holder of any applicable note shall be necessary to permit the Agent and the Issuer to execute supplemental fiscal and paying agency agreements as described under "Modification and Waiver—Without Consent of Holders" above.

Any modifications, amendments or waivers to the FPAA or to the conditions of the applicable notes will be conclusive and binding on all Holders of the applicable notes, whether or not they have consented to such action or were present at the meeting at which such action was taken, and on all future holders of the applicable notes, whether or not notation of such modifications, amendments or waivers is made upon such notes. Any instrument given by or on behalf of any Holder of such a note in connection with any consent to any such modification, amendment or waiver will be irrevocable once given and will be conclusive and binding on all subsequent registered holders of such note.

Prescription

Under New York's statute of limitations, any legal action upon the notes in respect of interest or principal must be commenced within six years after the payment thereof is due. Thereafter the notes will become generally unenforceable.

Notice

So long as the notes are listed on the Official List of the UK Listing Authority and admitted to trading on the Regulated Market, notices to Holders of notes will be given by publication in a leading newspaper having general circulation in London, England (which is expected initially to be the Financial Times). Notices to Holders of notes will also be given by first-class mail postage prepaid to the last addresses of such Holders as they appear in the notes register. Such notices will be deemed to have been given on the date of such publication or mailing.

Listing

Application has been made to list the notes on the Official List of the UK Listing Authority and for the admission of the notes to trading on the Regulated Market. The Issuer has agreed to use its reasonable best efforts to maintain any such listing and admission to trading of the notes for so long as any of the notes remain outstanding.

Consent to Service

The Issuer will initially designate Fresh & Easy Neighborhood Market Inc., 2120 Park Place, Suite 200, El Segundo, California 90245, Attention: General Counsel, as its authorized agent for service of process in any legal suit, action or proceeding arising out of or relating to the performance of its obligations under the FPAA and the notes brought in any state or federal court in the Borough of

Manhattan, the City of New York, and will irrevocably submit (but for those purposes only) to the nonexclusive jurisdiction of any such court in any such suit, action or proceeding.

Governing Law

The notes and the FPAA shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws thereof.

Regarding the Agent

In acting under the FPAA and in connection with the notes, the Agent is acting solely as agent of the Issuer and does not assume any obligation towards or relationship of agency or trust for or with the owners or Holders of the notes, except that any funds held by the Agent for payment of principal of or interest on the notes or Additional Amounts with respect thereto shall be held in trust by it for such owners and such Holders and applied as set forth in the notes, but need not be segregated from other funds held by it except as required by law. For a description of the duties and immunities and rights of the Agent under the FPAA, reference is made to the FPAA, and the obligations of the Agent are subject to such immunities and rights.

BOOK-ENTRY; DELIVERY AND FORM

The notes that are initially offered and sold in the United States to QIBs (within the meaning of Rule 144A) (the "Rule 144A notes") will be represented by beneficial interests in two or more Rule 144A global notes in registered form without interest coupons, which will be deposited on or about the closing date of the offering of the notes with Citibank, N.A., London Branch, as custodian (the "Custodian") for DTC and registered in the name of Cede & Co. as nominee of DTC.

The notes that are offered and sold in reliance on Regulation S (the "Regulation S global notes") will be represented by beneficial interests in two or more Regulation S global notes in registered form without interest coupons, which will be deposited on or about the closing date of the offering of the notes with the Custodian, and registered in the name of Cede & Co., as nominee of DTC. Investors may hold their interests in the global notes directly through DTC if they are participants in, or indirectly through organizations that are participants in, such systems. Euroclear and Clearstream will hold interests in the global notes on behalf of their participants through customers' securities accounts in their respective names on the books of their respective depositaries, which are participants in DTC.

So long as DTC or its nominee is the registered holder of a global note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the applicable notes represented by the applicable global note for all purposes under the applicable FPAA and the applicable notes (except as the context otherwise requires in respect of Additional Amounts). The notes (including beneficial interests in the global notes) will be subject to certain restrictions on transfer set forth therein and in the FPAA and will bear a legend regarding such restrictions as set forth under "—Notice to Investors" above. Under certain circumstances, transfers may be made only upon receipt by the Agent, in its capacity as transfer agent, of a written certification (in the form set out in the applicable FPAA).

Transfers within Global Notes

Subject to the procedures and limitations described herein, transfers of beneficial interests within a global note may be made without delivery to the Issuer or the Agent of any written certifications or other documentation by the transferor or transferee.

Transfers between Global Notes

A beneficial interest in a Rule 144A global note may be transferred to a person who wishes to take delivery of such beneficial interest through the applicable Regulation S global note only upon receipt by the Agent of a written certification (in the form set out in the FPAA) from the transferor to the effect that such transfer is being made in accordance with Rule 903 or 904 of Regulation S. Prior to the expiration of the distribution compliance period, a beneficial interest in a Regulation S global note may be transferred to a person who wishes to take delivery of such beneficial interest through the applicable Rule 144A global note only upon receipt by the Agent of a written certification (in the form set out in the FPAA) from the transferor to the effect that such transfer is being made to a person whom the transferor reasonably believes is a Qualified Institutional Buyer ("QIB") within the meaning of Rule 144A, in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any state of the United States and any other jurisdiction. After the expiration of the distribution compliance period, such certification requirements will no longer apply to such transfers, but such transfers will continue to be subject to applicable transfer restrictions under the Securities Act and the laws of any state of the United States and other jurisdictions. Any beneficial interest in a Rule 144A global note or a Regulation S global note that is transferred to a person who takes delivery in the form of a beneficial interest in the other global note will, upon transfer, cease to be a beneficial interest in such global note and become a beneficial interest in the other global note and, accordingly, will thereafter be subject to all transfer restrictions and

other procedures applicable to a beneficial interest in such other global note for so long as such person retains such an interest.

Transfers or Exchanges from Global Notes to Definitive Notes

No global note may be exchanged in whole or in part for notes in definitive registered form ("definitive notes") unless:

DTC notifies the Issuer that it is unwilling or unable to hold the applicable global note or DTC ceases to be a clearing agency registered under the Exchange Act, and in each case the Issuer does not appoint a successor depositary that is registered under the Exchange Act within 90 days;
a payment default has occurred and is continuing;
in the event of a bankruptcy default, the Issuer fails to make payment on the applicable notes when due; or
the Issuer shall have determined in its sole discretion that the applicable notes shall no longer be represented by global notes.

The Holder of a definitive note may transfer such note by surrendering it at the specified office of the Agent. Upon the transfer, exchange or replacement of definitive Rule 144A notes bearing the applicable legend set forth under "Notice to Investors", or upon specific request for removal of such legend on a definitive note, the Issuer will deliver only definitive notes that bear such legend, or will refuse to remove such legend, as the case may be, unless there is delivered to the Issuer and the Agent such satisfactory evidence, which may include an opinion of counsel, as may reasonably be required by the Issuer, that neither the legend nor the restrictions on transfer set forth therein are required to ensure compliance with the provisions of the Securities Act.

Each such definitive note will include terms substantially in the form of those set forth in the FPAA. Except as set forth herein, no global note may be exchanged in whole or in part for definitive notes.

Clearing and Settlement

The information set out below in connection with DTC is subject to any change in or reinterpretation of the rules, regulations and procedures of DTC currently in effect. The information about DTC set forth below has been obtained from sources that the Issuer believes to be reliable, but none of the Issuer or any of the Initial Purchasers takes any responsibility for the accuracy of the information. None of the Issuer or any of the Initial Purchasers will have any responsibility or liability for any aspect of the records relating to, or payments made on account of interests in notes held through, the facilities of any clearing system, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

DTC has advised the Issuer as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for DTC participants and to facilitate the clearance and settlement of transactions between DTC participants through electronic book-entry changes in accounts of DTC participants, thereby eliminating the need for physical movement of certificates. DTC participants include certain of the Initial Purchasers, securities brokers and dealers, banks, trust companies, clearing corporations and may in the future include certain other organizations ("DTC participants"). Indirect access to the DTC system is also available to others such as

banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC participant, either directly or indirectly ("indirect DTC participants").

Under the rules, regulations, and procedures creating and affecting DTC and its operations (the "Rules"), DTC is required to make book-entry transfers of notes among DTC participants on whose behalf it acts with respect to notes accepted into DTC's book-entry settlement system as described below (the "DTC notes") and to receive and transmit distributions of the nominal amount and interest on the DTC notes. DTC participants and indirect DTC participants with which beneficial owners of DTC notes ("Owners") have accounts with respect to the DTC notes similarly are required to make book-entry transfers and receive and transmit such payments on behalf of their respective Owners. Accordingly, although Owners who hold DTC notes through DTC participants or indirect DTC participants will not possess notes, the Rules, by virtue of the requirements described above, provide a mechanism by which such Owners will receive payments and will be able to transfer their interests with respect to the notes.

Transfers of ownership or other interests in the notes in DTC may be made only through DTC participants. Indirect DTC participants are required to effect transfers through a DTC participant. DTC has no knowledge of the actual beneficial owners of the notes. DTC's records reflect only the identity of the DTC participants to whose accounts the notes are credited, which may not be the beneficial owners. DTC participants will remain responsible for keeping account of their holdings on behalf of their customers and for forwarding all notices concerning the notes to their customers.

So long as DTC, or its nominee, is the registered holder of a global note, payments on the applicable notes will be made in immediately available funds to DTC. DTC's practice is to credit DTC participants' accounts on the applicable payment date in accordance with their respective holdings shown on its records, unless DTC has reason to believe that it will not receive payment on that date. Payments by DTC participants to beneficial owners will be governed by standing instructions and customary practices, and will be the responsibility of the DTC participants and not of DTC, or any other party, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment to DTC is the responsibility of the Agent. Disbursement of payments for DTC participants will be DTC's responsibility, and disbursement of payments to the beneficial owners will be the responsibility of DTC participants and indirect DTC participants.

Because DTC can only act on behalf of DTC participants, who in turn act on behalf of indirect DTC participants, and because owners of beneficial interests in the notes holding through DTC will hold interests in the notes through DTC participants or indirect DTC participants, the ability of the owners of the beneficial interests to pledge notes to persons or entities that do not participate in DTC, or otherwise take actions with respect to the notes, may be limited. DTC will take any action permitted to be taken by an Owner only at the direction of one or more DTC participants to whose account with DTC such Owner's DTC notes are credited. Additionally, DTC has advised the Issuer that it will take such actions with respect to any percentage of the beneficial interest of Owners who hold notes through DTC participants or Indirect Participants only at the direction of and on behalf of DTC participants whose account holders include undivided interests that satisfy any such percentage.

To the extent permitted under applicable law and regulations, DTC may take conflicting actions with respect to other undivided interests to the extent that such actions are taken on behalf of DTC participants whose account holders include such undivided interests.

Ownership of interests in the Rule 144A global notes and the Regulation S global notes will be shown on, and the transfer of that ownership will be effected only through records maintained by, DTC, the DTC participants and the indirect DTC participants, including Euroclear and Clearstream. Transfers between participants in DTC, as well as transfers between participants in Euroclear and Clearstream will be effected in the ordinary way in accordance with DTC rules.

Subject to compliance with the transfer restrictions applicable to the notes, cross-market transfers between DTC, on the one hand, and participants in Euroclear or Clearstream on the other hand, will be effected in DTC in accordance with DTC rules on behalf of Euroclear or Clearstream as the case may be. Such cross-market transactions, however, will require delivery of instructions to Euroclear or Clearstream, as the case may be, by the counterparty in such system in accordance with its rules and procedures and within its established deadlines. Euroclear or Clearstream, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to DTC to take action to effect final settlement on its behalf by delivering or receiving payment in accordance with DTC's Same-Day Funds Settlement System.

According to DTC, the foregoing information with respect to DTC has been provided to the industry for informational purposes only and is not intended to serve as a representation, warranty or contract modification of any kind. Although DTC, Euroclear and Clearstream have agreed to the foregoing procedures in order to facilitate transfers of interests in the global notes among participants of DTC, Euroclear and Clearstream they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at anytime. Neither the Issuer nor the Agent will have any responsibility for the performance by DTC, Euroclear or Clearstream or their respective participants or indirect participants, of their respective obligations under the rules and procedures governing their operations.

Initial Settlement in Relation to DTC Notes

Upon the issue of a Regulation S global note and/or a Rule 144A global note (a "DTC note") deposited with DTC or a custodian therefor, DTC or its custodian, as the case may be, will credit, on its internal system, the respective nominal amount of the individual beneficial interest represented by such relevant DTC note or notes to the accounts of persons who have accounts with DTC. Such accounts initially will be designated by or on behalf of the relevant Initial Purchasers. Ownership of beneficial interest in a DTC note will be limited to DTC participants, including Euroclear and Clearstream or indirect DTC participants. Ownership of beneficial interests in DTC notes will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of DTC participants) and the records of DTC participants (with respect to interests of indirect DTC participants). Investors that hold their interests in a DTC note will follow the settlement procedures applicable to global bond issues. Investors' securities custody accounts will be credited with their holdings against payment in same-day funds on the settlement date.

Secondary Market Trading in Relation to DTC Notes

Since the purchaser determines the place of delivery, it is important to establish at the time of the trade where both the purchaser's and seller's accounts are located to ensure that settlement can be made on the desired value date. Although DTC has agreed to the procedures described herein in order to facilitate transfers of interests in global notes deposited with DTC or a custodian therefor among participants of DTC, DTC is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Issuer nor any agent of the Issuer will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

Secondary market trading between DTC participants will be settled using the procedures applicable to global bond issues in same-day funds.

Payments

So long as any of the notes remains outstanding, the Issuer will maintain in London, England, so long as the notes are admitted to trading on the Regulated Market, an office or agency (a) where the

applicable notes may be presented for payment, (b) in the case of the Issuer, where the applicable notes may be presented for registration of transfer and for exchange and (c) where notices and demands to or upon the Issuer in respect of the notes or the FPAA may be served. If any note is exchanged in whole or in part for notes in definitive registered form as described in " —Transfers or Exchanges from Global Notes to Definitive Notes" above, the Issuer will also maintain an office or agency in New York City for the payment of principal of and interest on such notes in definitive registered form so long as any such notes are outstanding. The Issuer will give the Agent written notice of the location of any such office or agency and of any change of location thereof. The Issuer will initially designate the Agent for such purposes. The Issuer may also from time to time designate one or more other offices or agencies where the notes may be presented or surrendered for any or all such purposes or where such notices or demands may be served and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Issuer of any obligation to maintain an office or agency in London, England for such purposes; and provided further, however, that the Issuer will, to the extent possible as a matter of law, maintain a paying agent with a specified office in a Member State of the EU that will not be obligated to withhold or deduct tax pursuant to EU Directive 2003/48/EC on the taxation of savings or any law implementing or complying with, or introduced in order to conform to, the Directive. The Issuer shall give written notice to the Agent of any such designation or rescission and of any such change in the location of any other office or agency.

A Holder of notes may transfer or exchange notes in accordance with their terms. The Agent will not be required to accept for registration or transfer any notes, except upon presentation of satisfactory evidence (which may include legal opinions) that the restrictions on transfer have been complied with, all in accordance with such reasonable regulations as the Issuer may from time to time agree with such Agent.

Notwithstanding any statement herein, the Issuer reserves the right to impose or remove such transfer, certification, substitution or other requirements, and to require such restrictive legends on the notes, as they may determine are necessary to ensure compliance with the securities laws of the United States and the states therein and any other applicable laws or as may be required by any stock exchange on which the notes are listed. The Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchange or registration of transfer of notes and any other expenses (including the fees and expenses of the Agent). No service charge will be made for any such transaction.

The Agent will not be required to exchange or register a transfer of (i) any notes for a period of 15 days ending the due date for any payment of principal in respect of the notes or the first mailing of any notice of redemption of notes to be redeemed or (ii) any notes selected, called or being called for redemption.

The notes will be issued in registered form without coupons and transferable in denominations of $200,000 and integral multiples of $1,000 in excess thereof.

The laws of some jurisdictions require that certain persons take physical delivery in definitive form of securities which they own. Consequently, the ability to transfer beneficial interests in the global notes is limited to such extent.

TAX CONSIDERATIONS

The following summary of material US federal income and United Kingdom tax considerations is based upon laws, regulations, decrees, rulings, administrative practice and judicial decisions in effect at the date of this document. Legislative, judicial or administrative changes or interpretations may, however, be forthcoming. Any such changes or interpretations could affect the tax consequences to holders of the notes, possibly on a retroactive basis, and could alter or modify the statements and conclusions set forth herein. This summary does not purport to be a legal opinion or to address all tax aspects that may be relevant to a holder of the notes. Prospective purchasers of the notes are advised to consult their own tax advisers as to the tax consequences, under the tax laws of the country of which they are resident, of a purchase of notes including, without limitation, the consequences of the receipt of interest and (if applicable) any premium on, and of the sale or redemption of, the notes or any interest therein.

Certain United Kingdom Tax Considerations

General

The following summary is a general description of the principal UK tax consequences of an investment in the notes by certain investors who are neither resident nor (in the case of individuals) ordinarily resident in the United Kingdom ("non-UK investors"). It is based on the Issuer's understanding of current UK tax law and H.M. Revenue & Customs ("HMRC") practice. Such law may be repealed, revoked or modified (possibly with retrospective effect) and such practice may change, resulting in UK tax consequences different from those discussed below. The summary below does not purport to be a complete analysis of all UK tax considerations relating to the notes for non-UK investors. The comments relate only to the position of non-UK investors who are absolute beneficial owners of notes and some aspects do not apply to certain classes of taxpayer, such as dealers in securities or persons who are connected or associated with the Issuer for tax purposes, to whom special rules may apply.

Prospective investors should consult their own professional advisers as to the tax consequences of the purchase, ownership and disposal of notes in light of their own particular circumstances, including the effect of any state, local or other national laws. No representations with respect to the tax consequences for any particular investor of notes are made below.

Interest on the Notes

The references to "interest" in the following summary mean "interest" as understood in UK tax law. No account is taken in any of the following statements of any different definitions of "interest" or "principal" which may prevail under any other law or which may be created by the terms and conditions of the notes or any related documentation.

Withholding Tax

So long as the notes are and continue to be listed on a "recognised stock exchange" within the meaning of section 1005 of the Income Tax Act 2007 (the "Act"), they will constitute "quoted Eurobonds" within the meaning of section 987 of the Act. In the case of notes to be traded on the London Stock Exchange, which is a "recognised stock exchange" within the meaning of section 1005 of the Act, this condition will be satisfied if the notes are listed on the Official List and admitted to trading on the Regulated Market. Accordingly, payments of interest on the notes may be made without withholding or deduction for or on account of UK income tax provided the notes remain so listed and admitted at the time of payment.

In other cases, interest on the notes will be paid under deduction on account of UK income tax at the lower rate (currently 20%), subject to any direction to the contrary from HMRC in respect of such relief as may be available pursuant to the provisions of any applicable double taxation treaty and subject to any other exemption which may apply.

If interest is paid under deduction of UK income tax, non-UK investors may be able to recover all or part of the UK tax deducted if there is an appropriate provision in an applicable double taxation treaty. For example, certain residents of the United States may qualify for benefits under the income and capital gains tax convention between the United States and the United Kingdom that was signed on 24 July 2001 (and amended by a Protocol signed on 19 July 2002).

Direct Assessment

Interest paid on the notes will have a UK source and accordingly may be chargeable to UK tax by direct assessment. Where the interest is paid without withholding or deduction for or on account of UK income tax, the interest will not be assessed to UK tax in the hands of non-UK investors, except where such persons carry on a trade, profession or vocation in the United Kingdom through a UK branch or agency (in the case of an individual) or a permanent establishment (in the case of a company) in connection with which the interest is received or to which the notes are attributable. In such a case, UK tax may (subject to exemptions for interest received by certain categories of agent) be levied on the UK branch or agency or permanent establishment.

The provisions relating to Additional Amounts referred to in "Description of the Notes—Payment of Additional Amounts" would not apply if HMRC sought to assess directly the person entitled to the relevant interest to UK tax. However exemption from, or reduction of, such UK tax liability might be available under an applicable double taxation treaty.

Provision of Information

Persons in the United Kingdom (including the Issuer) by or through whom interest is paid to, or by whom interest is received on behalf of, an individual (whether resident in the United Kingdom or elsewhere) may be required to provide certain information to HMRC regarding the payment and the identity of the payee or person entitled to the interest. In certain circumstances, such information may be exchanged with tax authorities in other jurisdictions.

Disposal (including Redemption) of the Notes

Non-UK investors will not be liable to UK taxation in relation to any profits or gains (including currency exchange rate differences calculated by ascertaining the difference between the pound sterling equivalent at the date of acquisition of the consideration given for a notes and the pound sterling equivalent at the date of disposal of the proceeds received on disposal of a note) realized on the sale or other disposal or redemption of notes unless they carry on a trade, profession or vocation in the United Kingdom through a UK branch or agency (in the case of an individual) or a UK permanent establishment (in the case of a corporate investor) and such notes are or have been used or acquired for the purposes of such trade, profession or vocation, or such branch or agency or permanent establishment.

Stamp Duty/Stamp Duty Reserve Tax

No UK stamp duty or stamp duty reserve tax is payable on the issue of the notes or on a transfer of the notes.

EU

Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State of the European Union (each a "Member State") is required to provide to the tax authorities of any other Member State details of payments of interest (or similar income), which for this purpose may include payments on redemption of the notes representing any discount on issue or premium payable on redemption, paid by a person within its jurisdiction to or for the benefit of, or collected by such person for, an individual resident in that other Member State or to certain limited types of entities established in that other Member State. However, for a transitional period, Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). A number of non-EU countries and territories including Switzerland have adopted similar measures (a withholding system in the case of Switzerland).

The European Commission has proposed certain amendments to the Directive, which may, if implemented, amend or broaden the scope of the requirements described above.

Certain United States Federal Income Tax Considerations

The following discussion is a summary based on present law of certain US federal income tax considerations relevant to the purchase, ownership and disposition of the notes. This discussion addresses only US noteholders who purchase notes in the original offering at the original offering price, hold the notes as capital assets and use the US dollar as their functional currency. This discussion is not a complete description of all US tax considerations relating to the notes. It does not address all of the tax considerations applicable to prospective purchasers that will hold the notes in connection with a permanent establishment or other qualified business unit outside of the United States. It also does not address the tax treatment of prospective purchasers subject to special rules, such as banks, dealers, traders that elect to mark-to-market, insurance companies, investors liable for the alternative minimum tax, US expatriates, tax-exempt entities or persons holding the notes as part of a hedge, straddle, conversion or other integrated financial transaction.

THE FOLLOWING STATEMENTS ABOUT US FEDERAL TAX ISSUES ARE MADE TO SUPPORT MARKETING OF THE NOTES. NO TAXPAYER CAN RELY ON THEM TO AVOID TAX PENALTIES. EACH PROSPECTIVE PURCHASER SHOULD SEEK ADVICE FROM AN INDEPENDENT TAX ADVISOR ABOUT THE TAX CONSEQUENCES UNDER ITS OWN PARTICULAR CIRCUMSTANCES OF INVESTING IN THE NOTES UNDER THE LAWS OF THE UNITED STATES CONSTITUENT JURISDICTIONS AND ANY OTHER JURISDICTION WHERE THE PURCHASER MAY BE SUBJECT TO TAXATION.

For purposes of this discussion, a "US noteholder" is a beneficial owner of a book-entry interest in the notes, or the beneficial owner of an interest in a definitive note that is, for purposes of US federal income taxation, (i) a citizen or individual resident of the United States, (ii) a corporation, partnership or other business entity taxable as a corporation created or organized under the laws of the United States or its political subdivisions, (iii) a trust subject to the control of one or more US persons and the primary supervision of a US court or (iv) an estate the income of which is subject to US federal income taxation regardless of its source.

If a partnership (including an entity treated as such for US federal income tax purposes) acquires or holds the notes, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partnership or partner of a partnership that acquires or holds the notes should consult its own tax advisors.

Interest

Interest on the notes, including any Additional Amounts, generally will be includible in the gross income of a U.S. holder in accordance with its regular method of tax accounting. The interest on the notes generally will be ordinary income from sources outside the United States. Although under current law no UK withholding tax on interest is expected for as long as the notes qualify as quoted Eurobonds, should any be imposed, a U.S. holder eligible for benefits under the income tax treaty between the United Kingdom and the United States may claim a complete exemption from UK withholding tax on interest, if any. See the discussion above in "—Certain United Kingdom Tax Considerations—Interest on the Notes— Withholding Tax" below.

The Issuer believes that the notes will not be issued with original issue discount ("OID") because the Issuer expects that (i) the notes will be sold at an initial issue price that reflects no more than a de minimis discount from par (generally a discount less than ¼ of 1 per cent. for each full year to maturity) and (ii) it is significantly more likely than not that a Change of Control Triggering Event will not occur. Prospective purchasers of the notes should consult their own tax advisors about the possibility that amounts payable on an early redemption could cause the notes to be treated as issued with OID.

Disposition

A US noteholder generally will recognize gain or loss on the sale, redemption or other disposition of a note in an amount equal to the difference between the amount realized (less any accrued but unpaid interest, which will be taxable as ordinary interest income to the extent not previously included in income) and the holder's adjusted tax basis in the note. A US noteholder's adjusted tax basis in a note generally will be the cost of such note less the US dollar value of any principal payments previously received by the holder.

Gain or loss on disposition of a note generally will be treated as capital gain or loss from US sources. Any capital gain or loss will be long-term capital gain or loss if the US noteholder has held the note for more than one year. The long-term capital gains of non-corporate US noteholders may be taxed at lower rates. Deductions for capital losses are subject to limitations.

Reporting and Backup Withholding

Payments of interest and proceeds from the sale, redemption or other disposition of a note, including applicable premium, if any, may be reported to the US Internal Revenue Service unless the holder establishes a basis for exemption. Backup withholding tax may apply to amounts subject to reporting if the holder fails to provide an accurate taxpayer identification number or fails to report all interest and dividends required to be shown on its US federal income tax returns. A US noteholder can claim a credit against its US federal income tax liability for the amount of any backup withholding and a refund of any excess. Prospective investors should consult their tax advisors as to their qualification for exemption from backup withholding and the procedure for establishing an exemption.

Certain US noteholders may be required to report information with respect to their investment in notes if the notes are not held through an account with a financial institution to the Internal Revenue Service. Investors who fail to report required information could become subject to substantial penalties. Potential investors should consult their own tax advisors regarding the possible implications of this legislation on their investment in notes.

THE DISCUSSION ABOVE IS A GENERAL SUMMARY. IT DOES NOT COVER ALL TAX MATTERS THAT MAY BE OF IMPORTANCE TO A PARTICULAR INVESTOR. EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT ITS OWN TAX ADVISOR ABOUT THE TAX CONSEQUENCES TO IT OF AN INVESTMENT IN NOTES IN LIGHT OF THE INVESTOR'S OWN CIRCUMSTANCES.

PLAN OF DISTRIBUTION

Pursuant to a purchase agreement dated November 28, 2011 (the "purchase agreement"), Barclays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated as representatives (the "representatives") of the Initial Purchasers and HSBC Securities (USA) Inc., ING Financial Markets LLC, Lloyds Securities Inc., Mitsubishi UFJ Securities (USA), Inc., RBS Securities Inc., Santander Investment Securities Inc. and Standard Chartered Bank (the "Co-Managers") have severally agreed with the Issuer, subject to the satisfaction of certain conditions, to purchase $500 million principal amount of the 2014 notes and $500 million principal amount of the 2017 notes. The respective principal amount of 2014 notes and 2017 notes to be purchased by each of the Initial Purchasers from the Issuer is set forth opposite their respective names below:

Initial Purchaser	Principal Amount Principal Amountof 2014 notes–––––––––––––––	of 2017 notes–––––––––––––––
Barclays Capital Inc.	$112,500,000	$112,500,000
Citigroup Global Markets Inc.	112,500,000	112,500,000
Deutsche Bank Securities Inc.	112,500,000	112,500,000
Merrill Lynch Pierce, Fenner & Smith Incorporated.	112,500,000	112,500,000
HSBC Securities (USA) Inc.	7,143,000	7,143,000
ING Financial Markets LLC	7,143,000	7,143,000
Lloyds Securities Inc.	7,143,000	7,143,000
Mitsubishi UFJ Securities (USA), Inc.	7,143,000	7,143,000
RBS Securities Inc.	7,143,000	7,143,000
Santander Investment Securities Inc.	7,143,000	7,143,000
Standard Chartered Bank	7,142,000–––––––––––––––	7,142,000–––––––––––––––
Total	$500,000,000––––––––––––––––––––––––––––––	$500,000,000––––––––––––––––––––––––––––––

The purchase agreement entitles the Initial Purchasers to terminate the purchase of the notes in certain circumstances prior to payment to the Issuer. The Issuer has agreed to indemnify the Initial Purchasers against certain liabilities in connection with the offer and sale of the notes and may be required to contribute to payments the Initial Purchasers may be required to make in respect thereof.

The Initial Purchasers initially propose to offer part or all of the notes at the offering prices set forth on the cover page hereof. After the initial offering of the notes, the offering prices may from time to time be varied by the Initial Purchasers.

The Issuer will not for a period of 15 days following the date of the purchase agreement, without the prior written consent of the representatives, offer, sell, contract to sell, pledge, otherwise dispose of, or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Issuer or any affiliate of the Issuer or any person in privity with the Issuer or any affiliate of the Issuer), directly or indirectly, or announce the offering, of any debt securities issued or guaranteed by the Issuer (other than the notes) that are denominated in US dollars, sold primarily in the US market and issued in an aggregate principal amount of $250 million or more.

The notes are new issues of securities with no established trading market. The notes are expected to be admitted to trading on the Regulated Market. The Initial Purchasers are not obligated to make a market in the notes and accordingly no assurance can be given as to the liquidity of, or trading market for, the notes. In connection with the offering, the representatives may purchase and sell notes in the open market.

These transactions may include over-allotment, syndicate covering transactions and stabilizing transactions. Over-allotment involves syndicate sales of notes in excess of the principal amount of the notes to be purchased by the representatives in the offering, which creates a syndicate short position. Syndicate covering transactions involve purchases of the notes in the open market after the distribution has been completed in order to cover syndicate short positions. Stabilizing transactions consist of certain bids or purchases of notes made for the purpose of pegging, fixing or maintaining the price of the notes.

The representatives may impose a penalty bid. Penalty bids permit the representatives to reclaim selling concessions from a syndicate member when they, in covering syndicate positions or making stabilizing purchases, repurchase notes originally sold by that syndicate member.

Any of these activities may cause the price of the notes to be higher than the price that otherwise would exist in the open market in the absence of such transactions. These transactions may be effected in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time at the sole discretion of the representatives, as applicable.

No action has been or will be taken in any jurisdiction that would permit a public offering of the notes or the possession, circulation or distribution of any material relating to the Issuer in any jurisdiction where action for such purpose is required. Accordingly, the notes may not be offered or sold, directly or indirectly, nor may any offering material or advertisement in connection with the notes (including this document and any amendment or supplement hereto) be distributed or published, in or from any country or jurisdiction except under circumstances that will result in compliance with any applicable rules and regulations of any such country or jurisdiction.

Some of the Initial Purchasers and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.

In addition, in the ordinary course of their business activities, the Initial Purchasers and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. Certain of the Initial Purchasers or their affiliates that have a lending relationship with us routinely hedge their credit exposure to us consistent with their customary risk management policies. Typically, such Initial Purchasers and their affiliates would hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in our securities, including potentially the notes offered hereby. Any such short positions could adversely affect future trading prices of the notes offered hereby. The Initial Purchasers and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments. In addition, affiliates of some of the Initial Purchasers are lenders under certain of our credit facilities. Citibank, N.A., London Branch, which is acting as the Agent and the Custodian, is an affiliate of Citigroup Global Markets Inc.

The Initial Purchasers expect that delivery of the notes will be made against payment therefore on the closing date, which will be the fifth business day following the pricing date of the offering (this settlement cycle being referred to as "T+5"). Under Rule 15c6-1 under the Exchange Act, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade notes on the pricing date or the immediately following business day will be required, by virtue of the fact that the notes initially will settle on a delayed basis, to agree to a delayed settlement cycle at the time of any such trade to prevent a failed

settlement and should consult their own advisors.

United States

The notes have not been and will not be registered under the Securities Act and may not be offered or sold within the US or to, or for the account or benefit of, US persons except in certain transactions exempt from the registration requirements of the Securities Act Accordingly, the notes are being offered and sold only (i) outside the US in reliance on Regulation S under the Securities Act and (ii) to QIBs in accordance with Rule 144A.

Each Initial Purchaser has represented and agreed with the Issuer that, except as permitted by the purchase agreement, (i) it has not offered or sold, and will not offer or sell, any notes as part of their distribution at any time except (x) to those it reasonably believes to be "qualified institutional buyers" (as defined in Rule 144A under the Act) or (y) in accordance with Rule 903 of Regulation S, (ii) neither it nor any person acting on its behalf has made or will make offers or sales of the notes in the United States by means of any form of general solicitation or general advertising (within the meaning of Regulation D) in the United States, (iii) in connection with each sale pursuant to (i)(x), it has taken or will take reasonable steps to ensure that the purchaser of such notes is aware that such sale may be made in reliance on Rule 144A, and (iv) neither it, nor any of its affiliates nor any person acting on its or their behalf has engaged or will engage in any directed selling efforts (within the meaning of Regulation S) with respect to the notes.

Terms used in the preceding two paragraphs have the meanings ascribed to them by Regulation S under the Securities Act.

In addition, until 40 days after the commencement of the offering of the notes, an offer or sale of notes within the US by any dealer (whether or not participating in the offering of the notes) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A under the Securities Act.

United Kingdom

Each Initial Purchaser has represented and agreed with the Issuer that it has communicated or caused to be communicated and will only cause to communicate any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA with persons who are "qualified investors" (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within Article 19 (5) of the FSMA (Financial Promotion) Order 2005, as amended (the "Order") and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order.

NOTICE TO INVESTORS

The notes have not been registered under the Securities Act or any state securities laws and, unless so registered, may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Accordingly, the notes offered hereby are being offered and sold only to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) in reliance on Rule 144A under the Securities Act and in offshore transactions in reliance on Regulation S under the Securities Act.

Each purchaser of notes, by its acceptance thereof, will be deemed to have acknowledged, represented to and agreed with us and the Initial Purchasers as follows:

1. It understands and acknowledges that the notes have not been registered under the Securities Act or any other applicable securities law, are being offered for resale in transactions not requiring registration under the Securities Act or any other securities law, including sales pursuant to Rule 144A under the Securities Act, and may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act or any other applicable securities law, pursuant to an exemption therefrom or in any transaction not subject thereto and in each case in compliance with the conditions for transfer set forth in paragraphs (4) and (5) below.
1. It is not an "affiliate" (as defined in Rule 144 under the Securities Act) of ours or acting on our behalf and it is either:
- (i) a qualified institutional buyer, or QIB, within the meaning of Rule 144A under the Securities Act and is aware that any sale of notes to it will be made in reliance on Rule 144A under the Securities Act, of which the acquisition will be for its own account or for the account of another QIB; or
- (ii) is purchasing the notes in an offshore transaction in accordance with Regulation S under the Securities Act.
1. It acknowledges that neither we nor the Initial Purchasers, nor any person representing us, our subsidiaries or the Initial Purchasers, has made any representation to it with respect to the offering or sale of any notes, other than the information contained in this document, which prospectus has been delivered to it and upon which it is relying in making its investment decision with respect to the notes. It has had access to such financial and other information concerning us and the notes as it has deemed necessary in connection with its decision to purchase any of the notes.
1. It is purchasing the notes for its own account, or for one or more investor accounts for which it is acting as a fiduciary or agent, in each case for investment, and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act or any state securities laws, subject to any requirement of law that the disposition of its property or the property of such investor account or accounts be at all times within its or their control and subject to its or their ability to resell such notes pursuant to Rule 144A, Regulation S or any other exemption from registration available under the Securities Act.
1. It understands and agrees that if in the future it decides to offer, resell, pledge or otherwise transfer any of the notes or any beneficial interest in the notes (in the case of the notes represented by a Regulation S Global Note, prior to the date which is forty days after the later of the date the notes were first offered and the date of the issuance of the notes), it will only do so (i) to us or any of our subsidiaries, (ii) for so long as the notes are eligible

pursuant to Rule 144A under the Securities Act to a person whom the seller reasonably believes is a QIB in a transaction meeting the requirements of Rule 144A, (iii) outside the United States in compliance with Rule 904 under the Securities Act, (iv) pursuant to another exemption from registration under the Securities Act (if available), (v) pursuant to an effective registration statement under the Securities Act, and in each of these cases (i) through (v) in accordance with any applicable securities laws of any state of the United States or any other relevant jurisdictions, subject to our and the fiscal agent's rights prior to any such offer, sale or transfer (I) pursuant to clause (v) to require the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them and (II) in each of the foregoing cases, to require that a certificate of transfer in the form appearing on the other side of the security is completed and delivered by the transferor to the fiscal agent.

It understands that the notes will bear a legend to the following effect unless otherwise agreed by us and the holder thereof:

Legend Rule 144A Global Note:

"NEITHER THIS NOTE NOR ANY BENEFICIAL INTEREST HEREIN HAS BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES FOR THE BENEFIT OF TESCO PLC (THE "ISSUER") AND ANY OF ITS SUCCESSORS IN INTEREST, THAT THIS NOTE MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (1) TO THE ISSUER OR ANY SUBSIDIARY THEREOF, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A) PURCHASING FOR ITS OWN ACCOUNT OR THE ACCOUNT OF ONE OR MORE OTHER QUALIFIED INSTITUTIONAL BUYERS IN ACCORDANCE WITH RULE 144A, (3) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (4) PURSUANT TO ANOTHER EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE), OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH SUCH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF THE ISSUER, AND ANY OF ITS SUCCESSORS IN INTEREST, THAT IT WILL NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE RESTRICTIONS REFERRED TO ABOVE AND WILL REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE FISCAL AGENT. THIS LEGEND WILL BE REMOVED ONLY AT THE OPTION OF THE ISSUER."

Legend Regulation S Global Note:

"THIS NOTE HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD OR DELIVERED IN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY US PERSON, UNLESS SUCH NOTES ARE REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF IS AVAILABLE. THIS LEGEND SHALL BE REMOVED AFTER THE EXPIRATION OF FORTY DAYS FROM THE LATER OF (i) THE DATE ON WHICH THIS NOTE WAS FIRST OFFERED AND (ii) THE DATE OF ISSUANCE OF THIS NOTE."

1. It agrees that it will give to each person to whom it transfers the notes notice of any restrictions on transfer of such notes.
1. It acknowledges that until 40 days after the commencement of the offering, any offer or sale of the notes within the United States by a dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A under the Securities Act.
1. It represents and agrees that (i) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity within the meaning of Section 21 of the FSMA received by it in connection with the issue or sale of any securities in circumstances in which Section 21(1) of the FSMA does not apply to us; and (ii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any securities in, from or otherwise involving the United Kingdom.
1. It represents and agrees that (i) it is able to fend for itself in the transactions contemplated by this document; (ii) no other representation with respect to the offer or sale of the notes has been made, other than the information contained in this document; (iii) the investment decision is solely based on the information contained in the prospectus; (iv) the Initial Purchasers make no representation or warranty as to the accuracy or completeness of this document; and (v) it has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its prospective investment and can afford the complete loss of such investment.
1. It acknowledges that the fiscal agent will not be required to accept for registration of transfer any notes except upon presentation of evidence satisfactory to us and the fiscal agent that the restrictions set forth therein have been complied with.
1. It acknowledges that we, the Initial Purchasers and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations, warranties and agreements and agrees that if any of the acknowledgements, representations, warranties and agreements deemed to have been made by its purchase of the notes are no longer accurate, it shall promptly notify the Initial Purchasers. If it is acquiring any notes as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such investor account and that it has full power to make the foregoing acknowledgements, representations and agreements on behalf of each such investor account.

SERVICE OF PROCESS AND ENFORCEABILITY OF CIVIL LIABILITIES

We are a public limited company organized under the laws of England and Wales. The documents governing the notes will be governed by the laws of England and Wales.

Almost all of our directors and key managers reside outside the United States and all or a substantial portion of the assets of such persons and our assets are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon our directors or key managers named in this document or enforce, in the US courts, judgments obtained outside US courts against our directors and key managers in any action.

England

The United States and England currently do not have a treaty providing for the reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Consequently, a final judgment for payment rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon US federal securities laws, would not automatically be enforceable in England. In order to enforce any judgment of a US court in England, proceedings must be initiated by way of an action on the judgment of the US court under common law before a court of competent jurisdiction in England. In such an action, an English court generally will not (subject to the following sentence) re-examine the merits of the original matter decided by a US court and will order summary judgment on the basis that there is no reasonable prospect of a defense to the claim for payment. The entry of an enforcement order by an English court is typically conditional upon the following:

the US court having had jurisdiction over the original proceedings according to English conflict of law rules;
the judgment of the US court being final and conclusive on the merits in the court in which the judgment was pronounced;
the judgment of the US court being for a definite sum of money;
the judgment of the US court not being for a sum payable in respect of a tax or other charge, or in respect of a fine or other penalty;
the judgment of the US court not being for multiple damages arrived at by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damage sustained;
the judgment not having been obtained by the fraud of the party benefiting from it nor having been affected by any fraud of the US court itself;
the judgment not having been obtained in proceedings which breached principles of natural justice; and
the judgment of the US court not otherwise contravening English public policy.

Subject to the foregoing, investors may be able to enforce in England judgments in civil and commercial matters obtained from US federal or state courts. However, we cannot assure you that those judgments will be enforceable. In addition, it is doubtful whether an English court would accept jurisdiction and impose civil liability in an original action commenced in England and predicted solely upon US federal securities laws.

INDEPENDENT AUDITORS

The consolidated financial statements of Tesco PLC as of and for the 52 weeks ended February 26, 2011 and February 27, 2010 have been audited by PricewaterhouseCoopers LLP, Chartered Accountants and Registered Auditors, One Embankment Place, London WC2N 6RH, United Kingdom, the Group's independent auditors.

In the May 6, 2011 and May 5, 2010 reports of PricewaterhouseCoopers LLP, with respect to such audited consolidated financial statements, our auditors, in accordance with guidance issued by The Institute of Chartered Accountants in England and Wales, state: "This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing".

The SEC would not permit the language quoted in the above paragraph to be included in a registration statement or a prospectus used in connection with an offering of securities registered under the Securities Act or in a report filed under the Exchange Act. The effect of such language is untested by a US court (or any other court) and thus may or may not be effective to limit the direct liability of the auditors under US law or under any other law to persons such as investors in the notes.

LEGAL MATTERS

Certain legal matters with respect to the notes offered hereby will be passed on for us by Freshfields Bruckhaus Deringer LLP, English and US counsel. Certain legal matters with respect to the notes will be passed upon for the Initial Purchasers by Davis Polk & Wardwell LLP, US counsel.

ADDITIONAL INFORMATION

We are not currently subject to the periodic reporting and other information requirements of the US Exchange Act.

If you purchase the notes from the Initial Purchasers, you will be furnished with a copy of this document and, to the extent provided by us to the Initial Purchasers for such purposes, any related amendments or supplement to this document. Where you receive this document you acknowledge that:

1. you have been afforded an opportunity to request from us, and to review and have received, all additional information considered by you to be necessary to verify the accuracy and completeness of the information herein;
1. you have not relied on the Initial Purchasers or any person affiliated with the Initial Purchasers in connection with your investigation of the accuracy of such information or your investment decision; and
1. except as provided pursuant to (1) above, no person has been authorized to give any information or to make any representation concerning the notes offered hereby other than those contained herein and, if given or made, such other information or representation should not be relied upon as having been authorized by us or the Initial Purchasers.

While any notes remain outstanding, we will make available, upon request, to any holder and any prospective purchaser of notes, any information required pursuant to Rule 144A(d)(4) under the Securities Act in order to permit sales under Rule 144A, if, at the time of such request, we are neither a reporting company pursuant to the Exchange Act, nor exempt from reporting under the Exchange Act pursuant to Rule 12g3-2(b) thereunder. Any such request should be directed to us at Tesco House, Delamare Road, Cheshunt, Hertfordshire EN8 9SL, United Kingdom, attention: Company Secretary, telephone no: +44 (0) 1992 632222.

LISTING AND GENERAL INFORMATION

The Issuer

The Issuer, Tesco PLC, a public limited company incorporated under the laws of England and Wales, was incorporated on November 27, 1947 under registration number 445790.

The Issuer's registered address is Tesco House, Delamare Road, Cheshunt, Hertfordshire EN8 9SL, and its telephone number is +44 (0) 1992 632222.

Business

The Issuer is a holding company within our group and does not conduct any revenue-generating operations of its own. Its sole purpose is the holding of the shares in its subsidiaries.

Share capital

As of October 31, 2011 (being the latest practicable date prior to the publication of this document), the issued share capital of the Issuer was £400,853,979 divided into 8,017,079,584 shares with a par value of 5p per share. The creation and issuance of the notes have been authorized by a resolution of the Issuer's board of directors dated November 28, 2011 and a resolution of a special committee of the Issuer's board of directors dated November 28, 2011.

Financial statements and auditors' report

The Issuer's statutory annual financial statements are prepared on the basis of a financial year ended on the last Saturday in February, with the last fiscal year ending on February 26, 2011.

The Issuer's audited annual financial statements will be available free of charge at the Issuer's website at tesco.com.

General Information

There has been no material adverse change in the Issuer's prospects since February 26, 2011, the date of the last published audited financial statements.

There has been no significant change in the financial or trading position of the Group since August 27, 2011, the end of the last financial period for which interim financial information has been published.

For the avoidance of doubt, any website referred to in this document does not form part of the prospectus prepared in connection with the proposed offering of the notes.

Listing

It is expected that listing of the notes on the Official List of the UK Listing Authority and admission of the notes to trading on the Regulated Market will be granted on or about December 5, 2011, subject only to the issue of the notes. Prior to such official listing and admission to trading, however, the London Stock Exchange will permit dealings in the notes in accordance with its rules. We expect that the total fees and commissions and expenses related to the listing and admission of the notes to trading will be approximately $4 million.

Clearing Systems

We expect that the global notes sold pursuant to Regulation S will be accepted for clearance through the facilities of DTC, Euroclear and Clearstream Luxembourg. The ISIN number for the 2014 notes sold pursuant to Regulation S is USG87623JG33 and the ISIN number for the 2017 notes sold pursuant to Regulation S is USG87623JH16. We expect that the global notes sold pursuant to Rule 144A will be accepted for clearance through the facilities of DTC, Euroclear and Clearstream Luxembourg. The ISIN number for the 2014 notes sold pursuant to Rule 144A is US881575AE44 and the ISIN number for the 2017 notes sold pursuant to Rule 144A is US881575AF19. The CUSIP number for the 2014 notes sold pursuant to Regulation S is G87623 JG3 and the CUSIP number for the 2017 notes sold pursuant to Regulation S is G87623 JH1. The CUSIP number for the 2014 notes sold pursuant to Rule 144A is 881575 AE4 and the CUSIP number for the 2017 notes sold pursuant to Rule 144A is 881575 AF1.

Credit Rating

As of the date of this document, our credit rating was A3 (stable) from Moody's Investors Service, Inc. and A- (stable) from Standard & Poor's, a division of The McGraw-Hill Companies, Inc and A- (stable) from Fitch Ratings Ltd.

Yield

The yield of the 2014 notes is 2.036 per cent. on an annual basis. The yield of the 2017 notes is 2.723 per cent. on an annual basis.

Consents and Authorizations

By the consummation of the offering of the notes, we expect to have obtained all necessary consents, approvals and authorizations in the jurisdiction of our incorporation in connection with the issue and performance of the notes. The creation and issuance of the notes was authorized by a resolution of the Issuer's board of directors dated on November 28, 2011 and a resolution of a special committee of the Issuer's board of directors dated November 28, 2011.

Documents on Display

Copies of the following documents may be inspected at our offices at Tesco House, Delamare Road, Cheshunt, Hertfordshire EN8 9SL during usual business hours on any week day (Saturday, Sunday and public holidays excepted) for the life of this document:

(a) our memorandum and articles of association;
(b) our Group Financial Statements;
(c) the fiscal and paying agency agreements each expected to be dated as of December 5, 2011, between the Issuer and Citibank, N.A., London Branch, as fiscal agent, paying agent, transfer agent and registrar governing the notes.

Auditors' Review Report	F-2
Group Income Statement	F-3
Group Statement of Comprehensive Income	F-4
Group Balance Sheet	F-5
Group Statement of Changes in Equity	F-7
Group Cash Flow Statement	F-8

Auditors' Review Report	F-23
Group Income Statement	F-24
Group Statement of Comprehensive Income	F-25
Group Balance Sheet	F-26
Group Statement of Changes in Equity	F-28
Group Cash Flow Statement	F-29
Notes	F-31

F-43
F-44
F-45
F-46
F-47
F-48
F-49

Auditors' Audit Report	F-96
Group Income Statement	F-97
Group Statement of Comprehensive Income	F-98
Group Balance Sheet	F-99
Group Statement of Changes in Equity	F-100
Group Cash Flow Statement	F-101
Notes	F-102

Auditors' Audit Report	F-148
Group Income Statement	F-149
Group Statement of Recognised Income and Expense	F-150
Group Balance Sheet	F-151
Group Cash Flow Statement	F-152
Notes	F-153

Independent review report to Tesco PLC

Introduction

We have been engaged by the company to review the interim consolidated financial information in the half-yearly financial report for the 26 weeks ended 27 August 2011, which comprises the group income statement, the group statement of comprehensive income, the group balance sheet, the group statement of changes in equity, the group cash flow statement and related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim consolidated financial information.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The interim consolidated financial information included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the interim consolidated financial information in the half-yearly financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the interim consolidated financial information in the half-yearly financial report for the 26 weeks ended 27 August 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

PricewaterhouseCoopers LLP Chartered Accountants 4 October 2011 London

Note:

a) The maintenance and integrity of the Tesco PLC website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

TESCO PLC GROUP INCOME STATEMENT

26 weeks ended 27 August 2011

		2011		2010* Increase
	Notes	£m	£m	%
Continuing operations
Revenue (sales excluding VAT)	2	31,812	29,510	7.8
Cost of sales		(29,340)	(27,179)
Gross profit		2,472	2,331	6.0
Administrative expenses		(780)	(763)
Profits/losses arising on property-related items		245	261
Operating profit	2	1,937	1,829	5.9
Share of post-tax profits of joint ventures and associates		41	13
Finance income		93	98
Finance costs		(190)	(262)
Profit before tax		1,881	1,678	12.1
Taxation	3	(433)	(407)
Profit for the period from continuing operations		1,448	1,271	13.9
Discontinued operations
Loss for the period from discontinued operations	4	(65)	(82)
Profit for the period		1,383	1,189
Attributable to:
Owners of the parent		1,377	1,184
Non-controlling interests		6	5
		1,383	1,189	16.3

Earnings per share from continuing and discontinued operationsBasic	6	17.15p	14.78p	16.0
Diluted	6	17.09p	14.72p	16.1

Earnings per share from continuing operationsBasic	6	17.96p	15.81p	13.6
Diluted	6	17.90p	15.74p	13.7

Proposed interim dividend per share	5	4.63p	4.37p	5.9
Non-GAAP measure: underlying profit before tax	1	£m	£m
Profit before tax from continuing operations		1,881	1,678	12.1
Adjustments for:
IAS 32 and IAS 39 'Financial Instruments' – fair value
remeasurements		(32)	(18)
IAS 19 'Employee Benefits' - non-cash Group Income Statementcharge for pensions	9	29	85
IAS 17 'Leases' – impact of annual uplifts in rent and
rent-free periods		19	20
IFRS 3 'Business Combinations' - intangible asset amortisationcharges and costs arising from acquisitions		12	21
IFRIC 13 'Customer Loyalty Programmes' – fair value of awards		13	4
Restructuring costs		-	20
Underlying profit before tax from continuing operations		1,922	1,810	6.2
Underlying diluted earnings per share	6	18.30p	16.98p	7.8

TESCO PLC GROUP STATEMENT OF COMPREHENSIVE INCOME

26 weeks ended 27 August 2011

		2011	2010
	Note	£m	£m
Currency translation differences		134	(497)
Actuarial loss on defined benefit pension schemes	9	(190)	(60)
Gain on cash flow hedges:
- Net fair value gain		89	37
- Reclassified and reported in the Group Income Statement		(21)	7
Change in fair value of available-for-sale financial assets and
investments		4	-
Tax relating to components of other comprehensive income		(7)	64
Total other comprehensive income/(loss) for the period		9	(449)
Profit for the period		1,383	1,189
Total comprehensive income for the period		1,392	740

Attributable to:
Owners of the parent		1,394	739
Non-controlling interests		(2)	1

1,392 740

TESCO PLC GROUP BALANCE SHEET

As at 27 August 2011

201120112010Notes£m£m£mNon-current assetsGoodwill and other intangible assets74,5364,3384,223Property, plant and equipment725,49524,39824,251Investment property72,0231,8631,750Investments in joint ventures and associates330316147Other investments1,277938767Loans and advances to customers1,9822,1272,012Derivative financial instruments1,4941,1391,360Deferred tax assets44484737,18135,16734,557Current assets













Inventories3,6303,1622,941
Trade and other receivables2,7432,3302,111
Loans and advances to customers2,5772,5142,462
Derivative financial instruments119148102
Current tax assets744
Short-term investments5971,0221,178
Cash and cash equivalents81,9502,4282,459
11,62311,60811,257
Non-current assets classified as held for sale and assets
of the disposal group448943152
12,11212,03911,309
Current liabilities
Trade and other payables(11,177)(10,484)(9,780)
Financial liabilities
- Borrowings(1,321)(1,386)(1,665)
- Derivative financial instruments and other liabilities(181)(255)(222)
Customer deposits(5,122)(5,074)(4,731)
Deposits from banks(121)(36)(50)
Current tax liabilities(602)(432)(476)
Provisions(117)(64)(11)

(18,641)(17,731)(16,935)Liabilities directly associated with the disposal group4(113)-
(18,754)(17,731)(16,935)

Net current liabilities(6,642)(5,692)(5,626)

Non-current liabilities
Financial liabilities
- Borrowings(10,149)(9,689)(10,510)
- Derivative financial instruments and other liabilities(576)(600)(639)
Post-employment benefit obligations9(1,576)(1,356)(1,986)
Deferred tax liabilities(1,103)(1,094)(808)
Provisions(102)(113)(184)
(13,506)(12,852)(14,127)
Net assets17,03316,62314,804

* See Note 1 Basis of Preparation for details of reclassifications.

TESCO PLC GROUP BALANCE SHEET (continued)

As at 27 August 2011

	27 August2011	26 February2011	28 August2010
	£m	£m	£m
Equity
Share capital	401	402	401
Share premium	4,917	4,896	4,845
Other reserves	40	40	40
Retained earnings	11,663	11,197	9,440
Equity attributable to owners of the parent	17,021	16,535	14,726
Non–controlling interests	12	88	78
Total equity	17,033	16,623	14,804

TESCO PLC GROUP STATEMENT OF CHANGES IN EQUITY

26 weeks ended 27 August 2011

	Sharecapital	Sharepremium	Otherreserves	Retainedearnings	Total equityattributable toowners of theparent	Noncontrollinginterests	Totalequity
	£m	£m	£m	£m	£m	£m	£m
At 26 February 2011	402	4,896	40	11,197	16,535	88	16,623
Total comprehensive income	-	-	-	1,394	1,394	(2)	1,392
Transactions with owners
Shares purchased for
cancellation	(3)	-	-	(287)	(290)	-	(290)
Share-based payments	-	-	-	100	100	-	100
Issue of shares	2	21	-	-	23	-	23
Purchase of non-controllinginterests	-	-	-	73	73	(71)	2
Put option liability	-	-	-	(3)	(3)	-	(3)
Dividends paid to noncontrolling interests	-	-	-	-	-	(3)	(3)
Dividends authorised in theperiod	-	-	-	(811)	(811)	-	(811)
Total transactions with
owners	(1)	21	-	(928)	(908)	(74)	(982)
At 27 August 2011	401	4,917	40	11,663	17,021	12	17,033

	Sharecapital	Sharepremium	Otherreserves	Retainedearnings	Total equityattributable toowners of the	Noncontrollinginterests	Totalequity
					parent
At 27 February 2010	£m399	£m4,801	£m40	£m9,356	£m14,596	£m85	£m14,681
Total comprehensive income
Transactions with owners	-	-	-	739	739	1	740
Purchase of treasury shares	-	-	-	(43)	(43)	-	(43)
Share-based payments	-	-	-	112	112	-	112
Issue of shares	2	44	-	-	46	-	46
Purchase of non-controllinginterests	-	-	-	6	6	(6)	-
Dividends paid to noncontrolling interests	-	-	-	-	-	(2)	(2)
Dividends authorised in theperiod	-	-	-	(730)	(730)	-	(730)
Total transactions with
owners	2	44	-	(655)	(609)	(8)	(617)
At 28 August 2010	401	4,845	40	9,440	14,726	78	14,804

TESCO PLC GROUP CASH FLOW STATEMENT

26 weeks ended 27 August 2011

		2011	2010*
	Notes	£m	£m
Cash flows from operating activities
Cash generated from operations	10	2,430	2,399
Interest paid		(135)	(246)
Corporation tax paid		(277)	(319)
Net cash from operating activities		2,018	1,834
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired		(139)	(86)
Proceeds from sale of property, plant and equipment and noncurrent assets classified as held for sale		569	1,239
Purchase of property, plant and equipment and investmentproperty		(1,786)	(1,818)
Proceeds from sale of intangible assets		-	1
Purchase of intangible assets		(173)	(170)
Increase in loans to joint ventures		(1)	-
Decrease in loans to joint ventures		113	3
Investments in joint ventures and associates		(5)	(16)
Investments in short-term and other investments		(934)	(1,299)
Proceeds from sale of short-term and other investments		1,050	1,366
Dividends received from joint ventures and associates		27	34
Interest received		23	82
Net cash used in investing activities		(1,256)	(664)

Cash flows from financing activities
Proceeds from issue of ordinary share capital		23	46
Increase in borrowings		948	805
Repayment of borrowings		(1,081)	(1,849)
Repayment of obligations under finance leases		(23)	(20)
Dividends paid to equity holders	5	(811)	(730)
Dividends paid to non-controlling interests		(3)	(2)
Own shares purchased		(290)	(24)
Net cash used in financing activities		(1,237)	(1,774)
Net decrease in cash and cash equivalents		(475)	(604)
Cash and cash equivalents at beginning of the period		2,428	3,102
Effect of foreign exchange rate changes		7	(39)
Cash and cash equivalents including cash held in disposal
group at the end of the period		1,960	2,459
Cash held in disposal group		(10)	-
Cash and cash equivalents at the end of the period		1,950	2,459

Reconciliation of net cash flow to movement in net debt

26 weeks ended 27 August 2011

		2011	2010*
	Note	£m	£m
Net decrease in cash and cash equivalents		(475)	(604)
Investment in Tesco Bank		(50)	(149)
Elimination of net decrease/(increase) in Tesco Bank cash
and cash equivalents		192	(204)
Debt acquired on acquisitions		(98)	(6)
Net cash outflow to repay debt and lease financing		310	1,064
Decrease in short-term investments		(425)	(136)
Net decrease in joint venture loan receivables		(112)	(11)
Other non-cash movements		(154)	348
(Increase)/decrease in net debt for the period		(812)	302
Opening net debt		(6,790)	(7,929)
Closing net debt	11	(7,602)	(7,627)

NB: The reconciliation of net cash flow to movement in net debt is not a primary statement and does not form part of the cash flow statement but forms part of the notes to this interim consolidated financial information.

The notes on pages 21 to 33 form part of this interim consolidated financial information.

* See Note 1 Basis of Preparation for details of reclassifications.

The interim consolidated financial information for the 26 weeks ended 27 August 2011 was approved by the Directors on 4 October 2011.

NOTE 1 Basis of preparation

This interim consolidated financial information for the period ended 27 August 2011 has been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Services Authority and with IAS 34, 'Interim financial reporting', as adopted by the European Union. The accounting policies applied are consistent with those described in the Annual Report and Financial Statements 2011, apart from those arising from the adoption of new International Financial Reporting Standards (IFRS) detailed below. The interim consolidated financial information should be read in conjunction with the Annual Report and Financial Statements 2011, which have been prepared in accordance with International Financial Reporting Standards (IFRS) and the IFRS Interpretation Committee (IFRS IC) interpretations as endorsed by the European Union.

This interim consolidated financial information has been reviewed, not audited, and does not constitute statutory financial statements as defined in section 434 of the Companies Act 2006. The Annual Report and Financial Statements for the 52 weeks ended 26 February 2011 were approved by the Board of Directors on 6 May 2011 and have been filed with the Registrar of Companies. The report of the auditors on those financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

Adoption of new International Financial Reporting Standards

The Group adopted IAS 24 (Amended) 'Related Party Disclosures' and IFRIC 14 (Amended) 'Prepayments of a minimum funding requirement' as of 27 February 2011, with no impact on this interim consolidated financial information.

Discontinued operations

During the period, the Board approved a plan to dispose of its operations in Japan which is consistent with the Group's long-term strategic priority to drive growth and improve returns by focussing on its larger businesses in the region. These operations, which are expected to be sold within twelve months of the Balance Sheet date, have been classified as a disposal group. In accordance with IFRS 5 'Noncurrent Assets Held for Sale and Discontinued Operations', the net results for the period are presented within discontinued operations in the Group Income Statement and the assets and liabilities of the business are presented separately in the Group Balance Sheet.

Cash and cash equivalents

During the period, the Group identified certain assets held by Tesco Bank that had a maturity profile of less than three months that would be more appropriately classified as cash and cash equivalents in accordance with IAS 7 'Statement of Cash Flows'. The assets identified comprised loans and advances to banks, certificates of deposit (included within other investments) and other receivables. The amounts relating to these balances have accordingly been reclassified in the Group Balance Sheet and the Group Cash Flow Statement as cash and cash equivalents. The impact of these reclassifications, with no change to net assets is to:

x increase cash and cash equivalents by £558m, £482m and £283m at 26 February 2011, 28 August 2010 and 27 February 2010 respectively;
x decrease other investments by £170m, £225m and £165m at 26 February 2011, 28 August 2010 and 27 February 2010 respectively, such that other investments were £698m at 27 February 2010;
x decrease loans and advances to banks by £404m, £263m and £144m at 26 February 2011, 28 August 2010 and 27 February 2010 respectively, such that loans to advances to banks were £nil at 27 February 2010;
x increase trade and other receivables by £16m, £6m and £26m at 26 February 2011, 28 August 2010 and 27 February 2010 respectively, such that trade and other receivables were £1,914m at 27 February 2010; and
x increase cash flows from operating activities by £139m and decrease net cash used in investing activities by £60m for the 26 weeks ended 28 August 2010.

NOTE 1 Basis of preparation (continued)

Use of non-GAAP profit measures - Underlying profit

The Directors believe that underlying profit and underlying diluted earnings per share measures provide additional useful information for shareholders on underlying trends and performance. These measures are used for internal performance analysis. Underlying profit is not defined by IFRS and therefore may not be directly comparable with other companies' adjusted profit measures. It is not intended to be a substitute for, or superior to, IFRS measurements of profit. The adjustments made to reported profits before tax are:

x IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements. Under IAS 32 and IAS 39, the Group applies hedge accounting to its various hedge relationships when allowed under IAS 39 and when practical to do so. Sometimes, the Group is unable to apply hedge accounting to the arrangements, but continues to enter into these arrangements as they provide certainty or active management of the exchange rates and interest rates applicable to the Group. The Group believes that these arrangements remain effective and economically and commercially viable hedges despite the inability to apply hedge accounting.

Where hedge accounting is not applied to certain hedging arrangements, the reported results reflect the movement in fair value of related derivatives due to changes in foreign exchange and interest rates. In addition, at each period end, any gain or loss accruing on open contracts is recognised in the Group Income Statement for the period, regardless of the expected outcome of the hedging contract on termination. This may mean that the Group Income Statement charge is highly volatile, whilst the resulting cash flows may not be as volatile. The underlying profit measure removes this volatility to help better identify underlying business performance.

x IAS 19 'Employee Benefits' non-cash Income Statement charge for pensions. Under IAS 19, the cost of providing pension benefits in the future is discounted to a present value at the corporate bond yield rates applicable on the last day of the previous financial year. Corporate bond yields rates vary over time which in turn creates volatility in the Group Income Statement and Group Balance Sheet. IAS 19 also increases the charge for young pension schemes, such as Tesco's, by requiring the use of rates which do not take into account the future expected returns on the assets held in the pension scheme which will fund pension liabilities as they fall due. The sum of these two effects can make the IAS 19 charge disproportionately higher and more volatile than the cash contributions the Group is required to make in order to fund all future liabilities. Therefore, within underlying profit we have included the 'normal' cash contributions for pensions but excluded the volatile element of IAS 19 to represent what the Group believes to be a fairer measure of the cost of post-employment benefits.
x IAS 17 'Leases' impact of annual uplifts in rent and rent-free periods. The amount charged to the Group Income Statement in respect of operating lease costs and incentives is expected to increase significantly as the Group expands its international business. The leases have been structured in a way to increase annual lease costs as the businesses expand. IAS 17 requires the total cost of a lease to be recognised on a straight-line basis over the term of the lease, irrespective of the actual timing of the cost. This adjustment also impacts the Group's operating profit and rental income within the share of post-tax profits of joint ventures and associates.
x IFRS 3 (Revised) 'Business Combinations' intangible asset amortisation charges and costs arising from acquisitions. Under IFRS 3 intangible assets are separately identified and recorded at fair value. The acquired intangible assets are required to be amortised on a straight-line basis over their useful economic lives. This results in a non-cash charge that does not reflect the underlying performance of the business acquired. Similarly, the standard requires all acquisition costs to be expensed in the Group Income Statement. Due to their nature, these costs have been excluded from underlying profit as they do not reflect the underlying performance of the Group.
x IFRIC 13 'Customer Loyalty Programmes' fair value of awards. This interpretation requires the fair value of customer loyalty awards to be measured as a separate component of a sales transaction. The underlying profit measure removes this fair value allocation to present underlying business performance, and to reflect the performance of the operating segments as measured by management.
x Restructuring costs these relate to certain costs associated with the Group's restructuring activities and have been excluded from underlying profit as they do not reflect the Group's underlying performance.

NOTE 2 Segmental reporting

The Group's reporting 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 Executive Committee of the Board of Directors as it is primarily responsible for the allocation of resources to segments and the assessment of performance of the segments.

During the period, the Group announced its decision to sell its operations in Japan (previously reported as part of the Asia segment). Accordingly, these operations have been treated as discontinued. The reporting segments do not include any amounts for these discontinued operations, which are described in more detail in notes 1 and 4. The segment results for the 26 weeks ended 28 August 2010 have been represented for comparative purposes.

The CODM now considers the principal activities of the Group to be:

x Retailing and associated activities in:
- x the UK;
- x Asia Korea, Malaysia, China, Thailand, India;
- x Europe Turkey, Hungary, Poland, Czech Republic, Slovakia, Republic of Ireland (ROI); and
- x the United States (US)
x Retail banking and insurance services through Tesco Bank in the UK.

The CODM uses trading profit, as reviewed at monthly Executive Committee meetings as the key measure of the segments' results as it reflects the segments' underlying trading performance for the period under evaluation. Trading profit is a consistent measure within the Group.

Inter-segment turnover between the operating segments is not material.

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

26 weeks ended 27 August 2011	UK	Asia	Europe	US	TescoBank	Total atconstantexchange	Foreignexchange	Total atactualexchange
At constant exchange rates	£m	£m	£m	£m	£m	£m	£m	£m
Continuing operations
Sales inc. VAT(excluding IFRIC 13)	23,431	5,613	5,441	326	522	35,333	197	35,530
Revenue (excluding IFRIC 13)	21,196	5,233	4,731	322	522	32,004	164	32,168
Effect of IFRIC 13	(318)	(17)	(20)	-	-	(355)	(1)	(356)
Revenue	20,878	5,216	4,711	322	522	31,649	163	31,812
Trading profit/(loss)	1,273	291	227	(79)	44	1,756	17	1,773
Trading margin**	6.0%	5.6%	4.8%	(24.5%)	8.4%	5.5%		5.5%

26 weeks ended 27 August 2011	UK	Asia	Europe	US	TescoBank	Total atactualexchange
At actual exchange rates	£m	£m	£m	£m	£m	£m
Continuing operations
Sales inc. VAT(excluding IFRIC 13)	23,429	5,602	5,673	304	522	35,530
Revenue (excluding IFRIC 13)	21,196	5,223	4,927	300	522	32,168
Effect of IFRIC 13	(318)	(16)	(22)	-	-	(356)
Revenue	20,878	5,207	4,905	300	522	31,812
Trading profit/(loss)	1,273	292	237	(73)	44	1,773
Trading margin**	6.0%	5.6%	4.8%	(24.3%)	8.4%	5.5%

** Trading margin is based on revenue excluding IFRIC 13.

NOTE 2 Segmental reporting (continued)

26 weeks ended 28 August 2010*	UK	Asia	Europe	US	TescoBank	Total atconstantexchange	Foreignexchange	Total atactualexchange
At constant exchange rates	£m	£m	£m	£m	£m	£m	£m	£m
Continuing operations
Sales inc. VAT(excluding IFRIC 13)	21,869	4,492	5,045	240	474	32,120	536	32,656
Revenue (excluding IFRIC 13)	20,038	4,182	4,395	236	474	29,325	509	29,834
Effect of IFRIC 13	(299)	(11)	(13)	-	-	(323)	(1)	(324)
Revenue	19,739	4,171	4,382	236	474	29,002	508	29,510
Trading profit/(loss)	1,219	212	214	(92)	129	1,682	28	1,710
Trading margin**	6.1%	5.1%	4.9%	(39.0)%	27.2%	5.7%		5.7%

26 weeks ended 28 August 2010*	UK	Asia	Europe	US	TescoBank	Total atactualexchange
At actual exchange rates	£m	£m	£m	£m	£m	£m
Continuing operations
Sales inc. VAT(excluding IFRIC 13)	21,870	5,017	5,048	247	474	32,656
Revenue (excluding IFRIC 13)	20,038	4,679	4,399	244	474	29,834
Effect of IFRIC 13	(299)	(13)	(12)	-	-	(324)
Revenue	19,739	4,666	4,387	244	474	29,510
Trading profit/(loss)	1,218	246	212	(95)	129	1,710
Trading margin**	6.1%	5.3%	4.8%	(38.9)%	27.2%	5.7%

The Group's activities are, to some extent, subject to seasonal fluctuations. Tesco generally experiences an increase in sales in the fourth quarter of the year due to holiday periods. Sales are also influenced by seasonal weather conditions which can contribute towards higher sales in the summer months.

Reconciliation of trading profit to profit before tax from continuing operations

	26 weeks ended27 August 2011	26 weeks ended28 August 2010*
	£m	£m
Trading profit	1,773	1,710
Adjustments:
Profits/losses arising on property-related items	245	261
IAS 19 'Employee Benefits' - non-cash Group Income Statement charge
for pensions	(33)	(72)
IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods	(23)	(25)
IFRS 3 'Business Combinations' – intangible asset amortisation charges
and costs arising from acquisitions	(12)	(21)
IFRIC 13 'Customer Loyalty Programmes' – fair value of awards	(13)	(4)
Restructuring costs	-	(20)
Operating profit	1,937	1,829
Share of post-tax profit of joint ventures and associates	41	13
Finance income	93	98
Finance costs	(190)	(262)
Profit before tax	1,881	1,678
Taxation	(433)	(407)
Profit for the period from continuing operations	1,448	1,271

* See Note 1 Basis of Preparation.

** Trading margin is based on revenue excluding IFRIC 13.

NOTE 3 Taxation

	26 weeks ended27 August 2011£m	26 weeks ended28 August 2010£m
UK	351	336
Overseas	82	71
	433	407

A number of changes to the UK Corporation tax system were announced in the March 2011 UK Budget Statement. The Finance Act 2011 included legislation to reduce the main rate of corporation tax from 27% to 26% from 1 April 2011 and to 25% from 1 April 2012. The proposed reduction from 27% to 25% was substantively enacted at the balance sheet date.

The tax charge in the Group Income Statement is based on management's best estimate of the full year effective tax rate based on expected full year profits to 25 February 2012. The full year effective tax rate includes the impact to the Group Income Statement of calculating UK deferred tax balances at the reduced UK tax rate of 25%. The impact of this rate change on the Group Income Statement for the period is a reduction in the half year tax charge of £46m.

Further reductions to the main rate are proposed to reduce the rate by 1% per annum to 23% by 1 April 2014. These further changes had not been substantively enacted at the balance sheet date and, therefore, are not included in this interim consolidated financial information.

NOTE 4 Discontinued operations and assets classified as held for sale

	27 August2011£m	26 February2011£m	28 August2010£m
Assets of the disposal group	125	-	-
Non-current assets classified as held for sale	364	431	52
Total non-current assets classified as held for saleand assets of the disposal group	489	431	52
Total liabilities directly associated with the disposalgroup	(113)	-	-
Total net assets classified as held for sale	376	431	52

Discontinued operations

The tables below show the results of the discontinued operations in relation to the Group's decision to sell its operations in Japan which are included in the Group Income Statement, Group Balance Sheet and Group Cash Flow Statement respectively.

Income Statement	26 weeks ended27 August 2011£m	26 weeks ended28 August 2010£m
Revenue	222	245
Cost of sales	(258)	(306)
Administrative expenses	(15)	(21)
Net finance costs	(1)	-
Loss before tax on discontinued operations	(52)	(82)
Taxation	(13)	-
Loss for the period from discontinued operations	(65)	(82)
Loss per share impact from discontinued operationsBasicDilute	0.81p0.81p	1.03p1.02p

NOTE 4 Discontinued operations and assets classified as held for sale (continued)

	26 weeks ended27 August 2011£m	26 weeks ended28 August 2010£m
Non-GAAP measure: underlying loss before tax
Loss before tax on discontinued operationsAdjustments for:	(52)	(82)
Restructuring costs	5	9
Non-cash store impairment	29	-
Non-cash goodwill impairment	-	55
Underlying loss before tax on discontinued operations	(18)	(18)

In the second half of the year the Group expects to incur further one-off restructuring costs of approximately £16m following the announcement in early September 2011 to close 12 stores in Japan.

Balance Sheet	27 August 2011
	£m
Assets of the disposal group
Property, plant and equipment	28
Intangible assets	19
Inventories	19
Trade and other receivables	49
Cash and cash equivalents	10
Total assets of the disposal group	125
Liabilities of the disposal group
Trade and other payables	(68)
Borrowings	(42)
Other current liabilities	(3)
Total liabilities of the disposal group	(113)
Total net assets of the disposal group	12

Cash Flow Statement	26 weeks ended	26 weeks ended
	27 August 2011	28 August 2010
	£m	£m
Net cash flows from operating activities	(24)	(47)
Net cash flows from investing activities	(2)	(15)
Net cash flows from financing activities	28	29
Net cash flows from discontinued operations	2	(33)

		26 weeks ended27 August 2011		26 weeks ended28 August 2010
	Pence/Share	£m	Pence/share	£m
Amounts recognised as distributions to ownersin the period:
Final dividend for the prior financial year	10.09	811	9.16	730
Proposed interim dividend for the current financial year	4.63	371	4.37	351

The proposed interim dividend was approved by the Board on 4 October 2011 but has not been included as a liability as at 27 August 2011, in accordance with IAS 10 'Events after the reporting period'.

NOTE 6 Earnings per share and diluted earnings per share

Basic earnings per share amounts are calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares in issue during the period.

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.

		26 weeks ended			26 weeks ended
			27 August 2011			28 August 2010
	Basic	Potentially	Diluted	Basic	Potentially	Diluted
		dilutive			dilutive
		share			share
		options			options
Profit (£m)
- Continuing operations	1,442	-	1,442	1,266	-	1,266
- Discontinued operations	(65)	-	(65)	(82)	-	(82)
Total	1,377	-	1,377	1,184	-	1,184

Weighted average number of
shares (millions)	8,029	27	8,056	8,009	34	8,043
Earnings per share (pence)
- Continuing operations	17.96	(0.06)	17.90	15.81	(0.07)	15.74
- Discontinued operations	(0.81)	-	(0.81)	(1.03)	0.01	(1.02)
Total	17.15	(0.06)	17.09	14.78	(0.06)	14.72

There have been no transactions involving ordinary shares between the reporting date and the date of approval of this interim consolidated financial information which would significantly change the earnings per share calculations shown above.

		26 weeks ended27 August 2011		26 weeks ended28 August 2010*
	£m	pence/share	£m	pence/share
Profit from continuing operationsAdjustments for:	1,442	17.90	1,266	15.74
IAS 32 and IAS 39 'Financial Instruments' - fair valueremeasurements	(32)	(0.40)	(18)	(0.22)
IAS 19 'Employee Benefits' - non-cash Group IncomeStatement charge for pensions	29	0.36	85	1.06
IAS17 'Leases' – impact of annual uplifts in rent andrent-free periods	19	0.24	20	0.25
IFRS 3 'Business Combinations' - intangible assetamortisation charges and costs arising from acquisitions	12	0.15	21	0.25
IFRIC 13 'Customer Loyalty Programmes' – fair value ofawards	13	0.16	4	0.05
Restructuring costs	-	-	20	0.25
Tax effect of adjustments at the effective rate of tax(2011 – 23.0%; 2010 – 24.3%)	(9)	(0.11)	(32)	(0.40)
Underlying earnings from continuing operations	1,474	18.30	1,366	16.98

Reconciliation of non-GAAP underlying diluted earnings per share

Underlying diluted earnings per share reconciliation

	26 weeks ended27 August 2011		26 weeks ended28 August 2010*
	%£m		%	£m
Underlying profit before tax from continuing operations		1,922		1,810
Effective tax rate	23.0%	(442)	24.3%	(439)
Non-controlling interests		(6)		(5)
Total		1,474		1,366
Underlying diluted earnings per share (pence)		18.30		16.98

* See Note 1 Basis of Preparation.

NOTE 7 Capital expenditure and other commitments

In the 26 weeks ended 27 August 2011 there were additions to property, plant and equipment, investment property and other intangible assets of £2,097m (28 August 2010: £1,947m). There were disposals of property, plant and equipment, investment property and other intangible assets of £330m (28 August 2010: £676m). Commitments for capital expenditure contracted for, but not provided, at 27 August 2011 were £1,694m (26 February 2011: £1,521m).

Tesco Bank

At 27 August 2011 Tesco Bank has commitments of formal standby facilities, credit lines and other commitments to lend, totalling £6.6bn (26 February 2011: £7.1bn). The amount is intended to provide an indication of the volume of business transacted and not for the underlying credit or other risks.

NOTE 8 Cash and cash equivalents

	27 August2011£m	26 February2011*£m	28 August2010*£m	27 February2010*£m
Cash at bank and in hand	1,371	1,649	1,464	1,857
Short-term deposits	66	85	304	757
Cash with central banks	393	120	203	179
Other investments – certificates of deposits	120	170	225	165
Loans and advances to banks	-	404	263	144
Cash and cash equivalents	1,950	2,428	2,459	3,102

* See Note 1 Basis of Preparation for details of reclassifications.

NOTE 9 Post-employment benefits

Pensions

The Group operates a variety of post-employment benefit arrangements covering funded defined contribution and both funded and unfunded defined benefit schemes. The most significant of these are funded defined benefit pension schemes for the Group's employees in the UK, the Republic of Ireland and South Korea.

Principal assumptions

The valuations used for IAS 19 have been based on the most recent actuarial valuations as at 31 March 2008 and updated by Tower Watson Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes as at 27 August 2011. The major assumptions, on a weighted average basis, used by the actuaries were as detailed below.

	27 August2011%	26 February2011%	28 August2010%
Discount rate	5.9	5.9	5.4
Price inflation	3.3	3.5	3.1
Rate of increase in salaries	3.4	3.6	3.1
Rate of increase in pensions in payment**	3.1	3.3	2.9
Rate of increase in deferred pensions**	2.6	2.8	2.9
Rate of increase in career average benefits	3.3	3.5	3.1

**In excess of any Guaranteed Minimum Pension (GMP) element.

Movement in the deficit during the period

The movement in the deficit during the period was as follows:

	26 weeksended 27	52 weeksended 26	26 weeksended 28
	August 2011	February 2011	August 2010
	£m	£m	£m
Deficit in schemes at the beginning of the period	(1,356)	(1,840)	(1,840)
Current service cost	(242)	(499)	(270)
Past service cost	-	(29)	-
Other finance income/(cost)	4	(18)	(13)
Contributions by employer	209	433	198
Foreign currency translation	(1)	2	(1)
Actuarial (loss)/gain	(190)	595	(60)
Deficit in schemes at the end of the period	(1,576)	(1,356)	(1,986)

NOTE 10 Reconciliation of profit before tax to net cash generated from operations

	26 weeks ended27 August 2011	26 weeks ended28 August 2010*
	£m	£m
Profit before tax	1,881	1,678
Net finance costs	97	164
Share of post-tax profits of joint ventures and associates	(41)	(13)
Operating profit	1,937	1,829
Operating loss of discontinued operations	(51)	(82)
Depreciation and amortisation	735	702
Profits/losses arising on property-related items	(245)	(261)
Loss arising on sale of non property-related items	4	1
Impairment of goodwill	-	55
Net impairment of property, plant and equipment	27	-
Adjustment for non-cash element of pension charges	33	72
Share-based payments	100	112
Tesco Bank non-cash movements	112	44
Increase in inventories	(460)	(270)
Increase in trade and other receivables	(289)	(126)
Increase in trade and other payables and provisions	547	283
Tesco Bank decrease/(increase) in loans and advances to
customers	43	(408)
Tesco Bank increase in trade and other receivables	(248)	(19)
Tesco Bank net increase in customer and bank deposits, tradeand other payables, provisions and other financial liabilities
including borrowings	185	467
Decrease in working capital	(222)	(73)
Cash generated from operations	2,430	2,399

* See Note 1 Basis of Preparation for details of reclassifications.

NOTE 11 Analysis of changes in net debt

	At 26February2011/*	Tesco BankAt 26February2011*	Cashflow	Businesscombinations	Othernon-cashmovements	Net debtof disposalgroup	Eliminationof TescoBank	At 27August2011**
	£m	£m	£m	£m	£m	£m	£m	£m
Cash and cashequivalentsShort-term investmentsJoint venture loan andother receivables	1,7221,022493	706-34	(475)(425)(122)	---	7-(13)	(10)--	(514)-(34)	1,436597358
Bank and otherborrowings	(10,282)	(595)	155	(98)	(507)	40	600	(10,687)
Finance lease payablesNet derivative financialinstruments	(198)453	-(21)	2355	--	(10)369	2-	-53	(183)909
Net debt of disposalgroup	-	-	-	-	-	(32)	-	(32)
	(6,790)	124	(789)	(98)	(154)	-	105	(7,602)

* See Note 1 Basis of Preparation for details of reclassifications.

** These amounts relate to the net debt excluding Tesco Bank but including the disposal group.

Business combinations

During the period, the Group completed five business combination transactions as follows:

(i)	18 March 2011	Acquired 100% of the ordinary share capital relating to the 77 stores of MillsGroup in the UK for a cash consideration of £8m;
(ii)	1 April 2011	Acquired 100% of the ordinary share capital relating to the 87 franchised"kiosks" and 47 stores branded as Zabka and Koruna in the Czech Republicfor a cash consideration of £28m;
(iii)	18 April 2011	Acquired 80.25% of the ordinary share capital of Blinkbox EntertainmentLimited in the UK for a cash consideration of £3m;
(iv)	8 June 2011	Acquired 100% of the ordinary share capital of BzzAgent Inc and BzzAgentLimited for a cash consideration of £9m and deferred contingentconsideration of £15m; and
(v)	18 August 2011	Acquired the remaining 50% of the ordinary share capital of its joint ventureMulti Veste Czech Republic 9, s.r.o not already owned by the Group for atotal consideration of £22m, split equally between cash and equity.

The aggregate pre-acquisition net assets of the above business combinations were £2m. Fair value adjustments of £16m and non-controlling interests of £1m reduced these net assets to a provisional fair value of net liabilities acquired of £13m. The total consideration was £85m resulting in provisional goodwill on these business combinations of £98m. The goodwill represents synergies within the operating models and the economies of scale expected from incorporating the operations of acquired entities within the Group.

Other acquisitions

On 1 July 2011, the Group completed the acquisition of the remaining 6% of the ordinary share capital of Homeplus Co., Limited for a cash consideration of £73m.

NOTE 13 Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures and associates are disclosed as follows:

i) Trading transactions and balances

	parties	Sales to related	Purchases fromrelated parties		Amounts owed byrelated parties		Amounts owed torelated parties
	2011	2010	2011	2010	2011	2010	2011	2010
	£m	£m	£m	£m	£m	£m	£m	£m
Joint ventures	164	96	245	213	6	7	35	27
Associates	1	-	856	607	-	-	7	34

Sales to related parties consist of services/management fees and loan interest.

Purchases from related parties include £186m (28 August 2010: £133m) of rentals payable to the Group's joint ventures (including those joint ventures formed as part of the sale and lease back programme) and £856m (28 August 2010: £607m) of fuel purchased from Greenergy International Limited. In addition, duty on the fuel purchases paid by the Group to Greenergy International Limited was £990m (28 August 2010: £785m).

NOTE 13 Related party transactions (continued)

	of assets	Sale and leaseback	parties	Loans to related	parties	Loans from related	Injections ofequity funding
	2011	2010	2011	2010	2011	2010	2011	2010
	£m	£m	£m	£m	£m	£m	£m	£m
Joint ventures	-	958	355	296	26	23	5	-
Associates	-	-	34	8	-	-	-	16

ii) Non-trading transactions and balances

On 18 August 2011, the Group acquired the remaining 50% of the ordinary share capital of its joint venture in Multi Veste Czech Republic 9, s.r.o. The transaction was recorded as a business combination as required by IFRS 3 (Revised) 'Business Combinations' (see note 12).

A number of the Group's subsidiaries are members of one or more partnerships to whom the provisions of the Partnerships and Unlimited Companies (accounts) Regulations 1993 ('Regulations') apply. The accounts for those partnerships have been consolidated into these accounts pursuant to Regulation 7 of the Regulations.

iii) Transactions with key management personnel

There were no material transactions of balances between the Group and its key management personnel or their close family members.

During the interim period of the current financial year, no additional related parties transactions have taken place that have materially affected the financial position of the performance of the Group during that period. In addition, there were no material changes in the related parties transactions described in the last Annual Report that could have a material effect on the financial position or performance of the Group in the interim period of the current financial year.

NOTE 14 Contingent liabilities

There are a number of contingent liabilities that arise in the normal course of business which if realised are not expected to result in a material liability to the Group. The Group recognises provisions for liabilities when it is more likely than not that a settlement will be required and the value of such a payment can be reliably estimated.

Tesco Bank

The Financial Services Compensation Scheme (FSCS) is the UK statutory fund of last resort for customers of authorised financial services firms and pays compensation if a firm is unable to pay claims against it. The FSCS has borrowed from HM Treasury to fund these compensation costs associated with institutions that failed in 2008 and will receive receipts from asset sales, surplus cash flow and other recoveries from these institutions in the future.

The FSCS meets its obligations by raising management expense levies. These include amounts to cover the interest on its borrowings and compensation levies on the industry. Each deposit-taking institution contributes in proportion to its share of total protected deposits. The levy is calculated based on deposit balances held as at 31 December in each year and as such this is seen as the 'trigger event' under accounting rules.

If the FSCS does not receive sufficient funds from the failed institutions to repay HM Treasury in full it will raise compensation levies. At this time it is not possible to estimate the amount or timing of any shortfall resulting from the cash flows received from the failed institutions and, accordingly, no provision for compensation levies has been made in these financial statements.

NOTE 15 Events after the reporting period

On 21 September 2011, the Group announced plans to launch a property fund for Tesco Lotus in Thailand, with a value of more than £300m. The fund will be listed on the Thai Stock Exchange once approval has been granted by the Securities and Exchange Commission of Thailand.

Independent review report to Tesco PLC

Introduction

We have been engaged by the company to review the interim consolidated financial information in the half-yearly financial report for the 26 weeks ended 28 August 2010, which comprises the group income statement, the group statement of comprehensive income, the group balance sheet, the group statement of changes in equity, the group cash flow statement and related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim consolidated financial information.

Directors' responsibilities

Our responsibility

Scope of review

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the interim consolidated financial information in the half-yearly financial report for the 26 weeks ended 28 August 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

PricewaterhouseCoopers LLP Chartered Accountants 4 October 2010 London

Note:

a) The maintenance and integrity of the Tesco PLC website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

TESCO PLC GROUP INCOME STATEMENT

26 weeks ended 28 August 2010

		28 August	29 August
		2010		2009 Increase
	Notes	£m	£m	%
Continuing operations
Revenue (sales excluding VAT)	2	29,755	27,782	7%
Cost of sales		(27,485)	(25,734)
Gross profit		2,270	2,048	11%
Administrative expenses		(784)	(681)
Profit arising on property-related items		261	235
Operating profit	2	1,747	1,602	9%
Share of post-tax profits of joint ventures and associates		13	22
Finance income		98	88
Finance costs		(262)	(293)
Profit before tax		1,596	1,419	12%
Taxation	3	(407)	(390)
Profit for the period		1,189	1,029	16%

Attributable to:
Owners of the parent		1,184	1,027
Non-controlling interests		5	2
		1,189	1,029	16%
Earnings per share
Basic	5	14.78p	12.97p	14%
Diluted	5	14.72p	12.93p	14%

Dividend per share (including proposed interim dividend)	4	4.37p	3.89p	12%
Non-GAAP measure: underlying profit before tax	1	£m	£m
Profit before tax		1,596	1,419	12%
Adjustments for:
IAS 32 and IAS 39 'Financial Instruments' – fair value
remeasurements		(18)	(53)
IAS 19 Non-cash Income Statement charge for pensionsIAS 17 'Leases' – impact of annual uplifts in rent and		85	20
rent-free periods		20	18
IFRS 3 Intangible assets amortisation and costs arising
from acquisitions		21	62
IFRIC 13 'Customer Loyalty Programmes' – fair value of
awardsIAS 36 Impairment of goodwill arising on acquisitions		455	882
Restructuring costs		29	15
Underlying profit before tax		1,792	1,571	14%
Underlying diluted earnings per share	5	16.62p	14.48p	15%

TESCO PLC GROUP STATEMENT OF COMPREHENSIVE INCOME

26 weeks ended 28 August 2010

		28 August2010	29 August2009
	Notes	£m	£m

Foreign currency translation differences		(497)	51
Actuarial loss on defined benefit pension schemes	7	(60)	(432)
Gains/(losses) on cash flow hedges:
- Net fair value gains/(losses)		37	(181)
- Reclassified and reported in the Group Income Statement		7	(50)
Tax relating to components of other comprehensive income		64	125
Total other comprehensive income for the period		(449)	(487)
Profit for the period		1,189	1,029
Total comprehensive income for the period		740	542
Attributable to:
Owners of the parent		739	539
Non-controlling interests		1	3
		740	542

TESCO PLC GROUP BALANCE SHEET

As at 28 August 2010

		28 August2010	27 February2010	29 August2009Restated*
	Notes	£m	£m	£m

Non-current assets
Goodwill and other intangible assets	6	4,223	4,177	3,915
Property, plant and equipment	6	24,251	24,203	23,664
Investment property	6	1,750	1,731	1,603
Investments in joint ventures and associates		147	152	78
Other investments		992	863	259
Loans and advances to customers		2,012	1,844	1,792
Derivative financial instruments		1,360	1,250	1,055
Deferred tax assets		47	38	65
		34,782	34,258	32,431
Current assets
Inventories		2,941	2,729	2,586
Trade and other receivables		2,105	1,888	1,941
Loans and advances to customersLoans and advances to banks and other financial assets		2,462263	2,268144	2,0051,301
Derivative financial instruments		102	224	376
Current tax assets		4	6	10
Short-term investments		1,178	1,314	916
Cash and cash equivalents		1,977	2,819	1,955
		11,032	11,392	11,090
Non-current assets classified as held for sale		52	373	388
		11,084	11,765	11,478
Current liabilities
Trade and other payables		(9,780)	(9,442)	(8,845)
Financial liabilities
- Borrowings		(1,665)	(1,529)	(2,235)
- Derivative financial instruments and other liabilities		(222)	(146)	(277)
Customer deposits		(4,731)	(4,357)	(4,425)
Deposits by banks		(50)	(30)	-
Current tax liabilities		(476)	(472)	(515)
Provisions		(11)	(39)	(9)
		(16,935)	(16,015)	(16,306)

Net current liabilities		(5,851)	(4,250)	(4,828)
Non-current liabilities
Financial liabilities
- Borrowings		(10,510)	(11,744)	(11,359)
- Derivative financial instruments and other liabilities		(639)	(776)	(492)
Post-employment benefit obligations	7	(1,986)	(1,840)	(1,946)
Deferred tax liabilities		(808)	(795)	(656)
Provisions		(184)	(172)	(198)
		(14,127)	(15,327)	(14,651)
Net assets		14,804	14,681	12,952

* See Note 1 Basis of preparation

TESCO PLC GROUP BALANCE SHEET (continued)

As at 28 August 2010

		28 August	27 February	29 August
		2010	2010	2009Restated*
	Notes	£m	£m	£m
Equity
Share capital		401	399	397
Share premium		4,845	4,801	4,673
Other reserves		40	40	40
Retained earnings		9,440	9,356	7,786
Equity attributable to owners of the parent		14,726	14,596	12,896
Non–controlling interests		78	85	56
Total equity		14,804	14,681	12,952

TESCO PLC GROUP STATEMENT OF CHANGES IN EQUITY

26 weeks ended 28 August 2010

	Sharecapital	Sharepremium	Otherreserves	Retainedearnings	Total equityattributable toowners of theparent	Noncontrollinginterests	Totalequity
	£m	£m	£m	£m	£m	£m	£m
At 27 February 2010	399	4,801	40	9,356	14,596	85	14,681
Total comprehensive income	-	-	-	739	739	1	740
Transactions with owners
Purchase of treasury shares	-	-	-	(43)	(43)	-	(43)
Share-based payments	-	-	-	112	112	-	112
Issue of shares	2	44	-	-	46	-	46
Purchase of non-controllinginterests	-	-	-	6	6	(6)	-
Dividends paid to noncontrolling interests	-	-	-	-	-	(2)	(2)
Dividends authorised in theperiod	-	-	-	(730)	(730)	-	(730)
Total transactions withowners	2	44	-	(655)	(609)	(8)	(617)
At 28 August 2010	401	4,845	40	9,440	14,726	78	14,804

	Sharecapital	Sharepremium	Otherreserves	Retainedearnings	Total equityattributable toowners of theparent	Noncontrollinginterests	Totalequity
	£m	£m	£m	£m	£m	£m	£m
At 28 February 2009(restated*)	395	4,638	40	7,776	12,849	57	12,906
Total comprehensive income	-	-	-	539	539	3	542
Transactions with owners
Purchase of treasury shares	-	-	-	(10)	(10)	-	(10)
Share-based payments	-	-	-	123	123	-	123
Issue of shares	2	35	-	(2)	35	-	35
Purchase of non-controllinginterests	-	-	-	20	20	(4)	16
Dividends authorised in theperiod	-	-	-	(660)	(660)	-	(660)
Total transactions withowners	2	35	-	(529)	(492)	(4)	(496)
At 29 August 2009(restated*)	397	4,673	40	7,786	12,896	56	12,952

* See Note 1 Basis of preparation

TESCO PLC GROUP CASH FLOW STATEMENT

26 weeks ended 28 August 2010

		28 August2010	29 August2009
	Notes	£m	£m
Cash flows from operating activities
Cash generated from operations	8	2,260	2,244
Interest paid		(246)	(236)
Corporation tax paid		(319)	(159)
Net cash from operating activities		1,695	1,849
Cash flows from investing activities
(Acquisition of subsidiaries)/net reimbursement from acquisitions,
net of cash acquired		(86)	15
Proceeds from sale of property, plant and equipment		1,239	765
Purchase of property, plant and equipment and investment property		(1,818)	(1,576)
Proceeds from sale of intangible assets		1	2
Purchase of intangible assets		(170)	(74)
Decrease/(increase) in loans to joint ventures		3	(35)
Investments in joint ventures and associates		(16)	(6)
Investments in short-term and other investments		(1,644)	(916)
Proceeds from sale of short-term and other investments		1,651	1,233
Dividends received		34	10
Interest received		82	11
Net cash used in investing activities		(724)	(571)
Cash flows from financing activities
Proceeds from issue of ordinary share capital		46	35
Increase in borrowings		805	1,142
Repayment of borrowings		(1,849)	(3,294)
Repayment of obligations under finance leases		(20)	(21)
Dividends paid to equity holders	4	(730)	(660)
Dividends paid to non-controlling interests		(2)	-
Own shares purchased		(24)	(10)
Net cash used in financing activities		(1,774)	(2,808)
Net decrease in cash and cash equivalents		(803)	(1,530)

Cash and cash equivalents at beginning of the period		2,819	3,509
Effect of foreign exchange rate changes		(39)	(24)
Cash and cash equivalents at the end of the period		1,977	1,955

Reconciliation of net cash flow to movement in net debt

26 weeks ended 28 August 2010

	Notes	28 August2010£m	29 August2009£m
Net decrease in cash and cash equivalents		(803)	(1,530)
Investment in Tesco Bank		(149)	-
Elimination of net increase in Tesco Bank cash and cashequivalents		(5)	29
Net cash inflow from debt and lease financing		1,064	2,173
Increase in short-term investments		(136)	(317)
(Increase)/decrease in joint venture loan receivables		(11)	35
Debt acquired on acquisition		(6)	-
Other non-cash movements		348	(287)
Decrease in net debt for the period		302	103
Opening net debt		(7,929)	(9,600)
Closing net debt	9	(7,627)	(9,497)

NB: The reconciliation of net cash flow to movement in net debt is not a primary statement and does not form part of the cash flow statement but forms part of the interim consolidated financial information.

The interim consolidated financial information for the 26 weeks ended 28 August 2010 was approved by the Directors on 4 October 2010.

NOTE 1 Basis of preparation

This interim consolidated financial information has been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Services Authority and International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretation Committee (IFRIC) interpretations, as endorsed by the European Union (EU). The accounting policies applied are consistent with those described in the Annual Report and Financial Statements 2010 except for those described below. The interim consolidated financial information has been prepared in accordance with IAS 34 'Interim Financial Reporting' and should be read in conjunction with the Annual Report and Financial Statements 2010.

This interim consolidated financial information is not audited and does not constitute statutory financial statements as defined in section 434 of the Companies Act 2006. The Annual Report and Financial Statements for the 52 weeks ended 27 February 2010 were approved by the Board of Directors on 5 May 2010 and have been filed with the Registrar of Companies. The report of the auditors on those financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

Adoption of new International Financial Reporting Standards

The Group has adopted the following new and amended standards and interpretations as of 28 February 2010:

IFRS 3 (Revised) 'Business Combinations' is effective for periods beginning on or after 1 July 2009. The amended standard continues to apply the acquisition method to business combinations, but with certain significant changes. All payments to purchase a business will be recorded at fair value at the acquisition date, with some contingent payments subsequently remeasured at fair value through the income statement. Goodwill and non-controlling interests may be calculated on a gross or net basis. All transaction costs will be expensed.

IAS 27 (Revised) 'Consolidated and Separate Financial Statements' is effective for periods beginning on or after 1 July 2009. The standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control. It will no longer result in goodwill or gains and losses. The revised standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value and a gain or loss is recognised in the income statement.

The following standards, amendments and interpretations became effective for the first time for the financial year beginning 28 February 2010 but either have no material impact or are not applicable to the Group:

Amendments to IAS 39 'Financial Instruments: Recognition and Measurement' in respect of eligible hedged items. Effective from periods commencing on or after 1 July 2009, it provides clarification on identifying inflation as a hedged risk or portion and hedging with options.
IFRIC 17 'Distributions of Non-cash Assets to Owners' (effective from periods commencing on or after 1 July 2009) provides guidance on the appropriate accounting treatment when an entity distributes assets other than cash as dividends to its shareholders.
IFRIC 18 'Transfers of Assets from Customers' (effective from periods commencing on or after 1 July 2009) concludes that when an item of property, plant and equipment transferred meets the definition of an asset from the perspective of the recipient, the recipient should recognise the asset at its fair value on the date of the accordance with IAS 18 'Revenue'.

NOTE 1 Basis of preparation (continued)

Sale and repurchase agreement (Tesco Bank)

Consistent with the Group's Annual Report and Financial Statements 2010, the Treasury Bills and related Medium Term Notes previously recognised have been restated in the August 2009 Group Balance Sheet. The effect of the restatement on the Group Balance Sheet as at 29 August 2009 is a reduction in loans and advances to banks and other financial assets of £501m, with a related reduction in current borrowings. The effect also resulted in a restatement of £87m within the movements in working capital of Tesco Bank as set out in Note 8 below.

Business combinations

Under IFRS 3 (Revised) 'Business Combinations', any adjustments to the provisional fair values allocated within twelve months of an acquisition date are calculated as if the fair value at the acquisition date had been recognised from that date. As a result, goodwill relating to the acquisitions of Tesco Bank (acquired on 19 December 2008) has been restated in the August 2009 Group Balance Sheet consistent with the Group's Annual Report and Financial Statements 2010. The net impact of the restatement is an increase in goodwill of £35m, increase in deferred tax assets of £28m, increase in non-current provisions of £99m and a decrease in retained earnings of £36m.

Use of non-GAAP profit measures

Underlying profit

The adjustments made to reported profits before tax are:

x IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements – under IAS 32 and IAS 39, the Group applies hedge accounting to its various hedge relationships (principally interest rate swaps, cross currency swaps and forward exchange contracts and options) when it is allowed under the rules of IAS 39 and when practical to do so. Sometimes, the Group is unable to apply hedge accounting to the arrangements, but continues to enter into these arrangements as they provide certainty or active management of the exchange rates and interest rates applicable to the Group. The Group believes these arrangements remain effective and economically and commercially viable hedges despite the inability to apply hedge accounting.

Where hedge accounting is not applied to certain hedging arrangements, the reported results reflect the movement in fair value of related derivatives due to changes in foreign exchange and interest rates. In addition, at each period end, any gain or loss accruing on open contracts is recognised in the result for the period, regardless of the expected outcome of the hedging contract on termination. This may mean that the Group Income Statement charge is highly volatile, whilst the resulting cash flows may not be as volatile. The underlying profit measure removes this volatility to help better identify underlying business performance.

x IAS 19 Income Statement charge for pensions - Under IAS 19 'Employee Benefits', the cost of providing pension benefits in the future is discounted to a present value at the corporate bond yield rates applicable on the last day of the previous financial year. Corporate bond yields rates vary over time which in turn creates volatility in the Group Income Statement and Group Balance Sheet. IAS 19 also increases the charge for young pension schemes, such as Tesco's, by requiring the use of rates which do not take into account the future expected returns on the assets held in the pension scheme which will fund pension liabilities as they fall due. The sum of these two effects can make the IAS 19 charge disproportionately higher and more volatile than the cash contributions the Group is required to make in order to fund all future liabilities. Therefore, within underlying profit we have included the 'normal' cash contributions within the measure but excluded the volatile element of IAS 19 to represent what the group believes to be a fairer measure of the cost of providing postemployment benefits.

NOTE 1 Basis of preparation (continued)

Use of non-GAAP profit measures (continued)

x IAS 17 'Leases' impact of annual uplifts in rent and rent-free periods The amount charged to the Group Income Statement in respect of operating lease costs and incentives is expected to increase significantly as the Group expands its international business. The leases have been structured in a way to increase annual lease costs as the businesses expand. IAS 17 requires the total cost of a lease to be recognised on a straight-line basis over the term of the lease, irrespective of the actual timing of the cost. The impact of this straight-line treatment in the 26 weeks ended 28 August 2010 was a charge of £20m (2010 - £18m) to the Group Income Statement after deducting the impact of this straight-line treatment recognised as rental income within share of post-tax profits of joint ventures and associates.
x IFRS 3 (Revised) 'Business Combinations' Intangible assets amortisation and costs arising from acquisitions – under IFRS 3 intangible assets are separately identified and fair valued. The intangible assets are required to be amortised on a straight-line basis over their useful economic lives and as such is a non-cash charge that does not reflect the underlying performance of the business acquired. Similarly, the standard requires all acquisition costs to be expensed in the income statement. Due to their nature, these costs have been excluded from underlying profit as they do not reflect the underlying performance of the Group.
x IFRIC 13 'Customer Loyalty Programmes' This interpretation requires the fair value of customer loyalty awards to be measured as a separate component of a sales transaction. The underlying profit measure removes this fair value allocation to present underlying business performance, and to reflect the performance of the operating segments as measured by management.
x IAS 36 Impairment of goodwill arising on acquisitions In the 26 weeks ended 28 August 2010, the carrying value of goodwill relating to Japan was not fully recoverable, resulting in an impairment charge of £55m (2009 - £82m), and as such is a non-cash charge that does not reflect the underlying performance of the business. The recoverable amount for Japan was based on value-inuse, calculated from cash flow projections for five years using data from the Group's latest internal forecasts, the results of which are reviewed by the Board.
x Restructuring costs These relate to certain costs associated with the Group's restructuring activities and have been excluded from underlying profit as they do not reflect the Group's underlying performance. In the 26 weeks ended 28 August 2010 the Group incurred £29m (2009 - £15m) relating to restructuring activities.

NOTE 2 Segmental reporting

IFRS 8 requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision Maker ("CODM"). The CODM has been determined to be the Executive Committee of the Board of Directors as they are primarily responsible for the allocation of resources to segments and the assessment of performance of the segments.

Segmental trading profit is an adjusted measure of operating profit, which measures the performance of each segment before goodwill impairment, restructuring charges, profit arising on property-related items, impact on leases of annual uplifts in rent and rent-free periods, intangible assets amortisation charges and costs arising from acquisitions, adjustments to fair value of customer loyalty awards and replaces the IAS 19 pension charge with the 'normal' cash contributions for pensions.

Inter-segment turnover between the operating segments is not material.

The segment results for the 26 weeks ended 28 August 2010, for the period ended 29 August 2009 and the reconciliation of the segment measures to the respective statutory items included in the interim consolidated financial information are as follows:

				26 weeks ended 28 August 2010
	Total atAt constant exchange ratesconstantTesco							Total atactual
Continuing operations	UK	Asia	ROE	US	Bank	exchange	Foreignexchange	exchange
	£m	£m	£m	£m	£m	£m	£m	£m
Sales inc. VAT(excluding IFRIC 13)	21,869	4,720	5,045	240	474	32,348	566	32,914
Revenue (excluding IFRIC 13)	20,038	4,400	4,395	236	474	29,543	536	30,079
Effect of IFRIC 13	(299)	(11)	(13)	-	-	(323)	(1)	(324)
Revenue	19,739	4,389	4,382	236	474	29,220	535	29,755
Trading profit/(loss)	1,219	197	214	(92)	129	1,667	25	1,692
Trading margin *	6.1%	4.5%	4.9%	(39.0)%	27.2%	5.6%	-	5.6%

			At actual exchange rates			Total at
	UK	Asia	ROE	US	TescoBank	actualexchange
	£m	£m	£m	£m	£m	£m
Sales inc. VAT(excluding IFRIC 13)	21,870	5,275	5,048	247	474	32,914
Revenue (excluding IFRIC 13)	20,038	4,924	4,399	244	474	30,079
Effect of IFRIC 13	(299)	(13)	(12)	-	-	(324)
Revenue	19,739	4,911	4,387	244	474	29,755
Trading profit/(loss)	1,218	228	212	(95)	129	1,692
Trading margin *	6.1%	4.6%	4.8%	(38.9)%	27.2%	5.6%

NOTE 2 Segmental reporting (continued)

				26 weeks ended 29 August 2009
			At constant exchange rates		Tesco	Total atconstant	Foreign	Total atactual
Continuing operations	UK	Asia	ROE	US	Bank	exchange	exchange	exchange
	£m	£m	£m	£m	£m	£m	£m	£m
Sales inc. VAT(excluding IFRIC 13)	20,651	4,025	4,774	133	420	30,003	394	30,397
Revenue (excluding IFRIC 13)	19,172	3,760	4,169	131	420	27,652	369	28,021
Effect of IFRIC 13	(209)	(11)	(8)	-	(10)	(238)	(1)	(239)
Revenue	18,963	3,749	4,161	131	410	27,414	368	27,782
Trading profit/(loss)	1,155	173	187	(67)	115	1,563	(12)	1,551
Trading margin*	6.0%	4.6%	4.5%	(51.1)%	27.4%	5.7%	-	5.5%

			At actual exchange rates			Total at
	UK	Asia	ROE	US	TescoBank	actualexchange
	£m	£m	£m	£m	£m	£m
Sales inc. VAT(excluding IFRIC 13)	20,651	4,385	4,773	168	420	30,397
Revenue (excluding IFRIC 13)	19,172	4,093	4,170	166	420	28,021
Effect of IFRIC 13	(209)	(12)	(8)	-	(10)	(239)
Revenue	18,963	4,081	4,162	166	410	27,782
Trading profit/(loss)	1,155	175	191	(85)	115	1,551
Trading margin*	6.0%	4.3%	4.6%	(51.2%)	27.4%	5.5%

* Trading margin is based on revenue excluding IFRIC 13.

Reconciliation of trading profit to profit before tax

	26 weeks ended28 August 2010	26 weeks ended29 August 2009
	£m	£m
Trading profit	1,692	1,551
Adjustments:
Profit arising on property-related items	261	235
IAS 19 Non-cash Income Statement charge for pensions	(72)	6
IAS 17 'Leases' – impact of annual uplifts in rent andrent-free periods	(25)	(23)
IFRS 3 'Business Combinations' – intangible assets amortisationand costs arising from acquisitions	(21)	(62)
IFRIC 13 'Customer Loyalty Programmes' – fair value of awards	(4)	(8)
IAS 36 Impairment of goodwill arising from acquisitions	(55)	(82)
Restructuring costs	(29)	(15)
Operating profit	1,747	1,602
Share of post-tax profit of joint ventures and associates	13	22
Finance income	98	88
Finance costs	(262)	(293)
Profit before tax	1,596	1,419
Taxation	(407)	(390)
Profit for the period	1,189	1,029

NOTE 3 Taxation

	26 weeks ended28 August 2010£m	26 weeks ended29 August 2009£m
UK	336	330
Overseas	71	60
	407	390

A number of changes to the UK Corporation tax system were announced in the June 2010 Budget Statement. The Finance (No2) Act 2010 included legislation to reduce the main rate of corporation tax from 28% to 27% from 1 April 2011. The proposed reduction from 28% to 27% was substantively enacted at the balance sheet date.

The tax charge in the income statement is based on management's best estimate of the full year effective tax rate based on expected full year profits to 26 February 2011. The full year effective tax rate includes the impact to the income statement of calculating UK deferred tax balances at the reduced UK tax rate of 27%. The impact of this rate change on the interim income statement is a reduction in the half year tax charge of £21m.

Further reductions to the main rate are proposed to reduce the rate by 1% per annum to 24% by 1 April 2014. These further changes had not been substantively enacted at the balance sheet date and, therefore, are not included in this financial information.

NOTE 4 Dividends

		26 weeks ended28 August 2010		26 weeks ended29 August 2009
	Pence/share	£m	Pence/share	£m
Amounts recognised as distributions to ownersin the period:
Final dividend for the prior financial year	9.16	730	8.39	660
Proposed interim dividend for the current financial year	4.37	351	3.89	309

The proposed interim dividend was approved by the Board on 4 October 2010 but has not been included as a liability as at 28 August 2010, in accordance with IAS 10 'Events after the balance sheet date'.

NOTE 5 Earnings per share and diluted earnings per share

Basic earnings per share amounts are calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares in issue during the period.

The dilution 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.

All operations are continuing for the periods presented.

			26 weeks ended28 August 2010			26 weeks ended29 August 2009
	Basic	Potentiallydilutiveshareoptions	Diluted	Basic	Potentiallydilutiveshareoptions	Diluted
Profit (£m)	1,184	-	1,184	1,027	-	1,027
Weighted average number ofshares (millions)	8,009	34	8,043	7,917	27	7,944
Earnings per share (pence)	14.78	(0.06)	14.72	12.97	(0.04)	12.93

		26 weeks ended		26 weeks ended
	£m	28 August 2010pence/	£m	29 August 2009pence/
		share		share
Profit
Earnings from operations	1,184	14.72	1,027	12.93
Adjustments for:
IAS 32 and IAS 39 'Financial Instruments' - fair valueremeasurements	(18)	(0.22)	(53)	(0.67)
IAS 19 Non-cash Income Statement charge for pensions	85	1.06	20	0.25
IAS17 'Leases' – impact of annual uplifts in rent and rentfree periods	20	0.25	18	0.23
IFRS 3 Intangible assets amortisation and costs arising fromacquisitions	21	0.25	62	0.78
IFRIC 13 'Customer Loyalty Programmes' – fair value ofawards	4	0.05	8	0.10
IAS 36 Impairment of goodwill arising on acquisitions	55	0.68	82	1.03
Restructuring costs	29	0.36	15	0.19
Tax effect of adjustments at the effective rate of tax(2010 – 25.1% 2009 – 26.7%)	(43)	(0.53)	(29)	(0.36)
Underlying earnings from operations	1,337	16.62	1,150	14.48

The effective tax rate of 25.1% (2009: 26.7%) excludes certain permanent differences on which tax relief is not available.

NOTE 5 Earnings per share and diluted earnings per share (continued)

Underlying diluted earnings per share reconciliation

		26 weeks ended28 August 2010		26 weeks ended29 August 2009
	%	£m	%	£m
Underlying profit before tax		1,792		1,571
Effective tax rate	25.1%	(450)	26.7%	(419)
Non-controlling interests		(5)		(2)
Total		1,337		1,150

Underlying diluted earnings per share (pence)		16.62p		14.48p

NOTE 6 Capital expenditure

In the 26 weeks ended 28 August 2010 there were additions to property, plant and equipment, investment property and other intangible assets of £1,947m (last interim period £1,638m). There were disposals of property, plant and equipment, investment property and other intangible assets of £676m (last interim period £350m). Commitments for capital expenditure contracted for, but not provided, at 28 August 2010 were £1,892m (last interim period £1,440m).

NOTE 7 Post-employment benefits

Pensions

Principal assumptions

The valuations used for IAS 19 have been based on the most recent actuarial valuations as at 31 March 2008 and updated by Tower Watson Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes as at 28 August 2010. The major assumptions, on a weighted average basis, used by the actuaries were as detailed below.

	28 August	27 February	29 August
	2010	2010	2009
	%	%	%
Discount rate	5.4	5.9	5.5
Price inflation	3.1	3.6	3.2
Rate of increase in salaries	3.1	3.6	3.3
Rate of increase in pensions in payment*	2.9	3.4	3.0
Rate of increase in deferred pensions*	2.9	3.6	3.1
Rate of increase in career average benefits	3.1	3.6	3.2

*In excess of any Guaranteed Minimum Pension (GMP) element.

Movement in the deficit during the period

The movement in the deficit during the period was as follows:

	26 weeksended 28	52 weeks ended27 February	26 weeksended 29
	August 2010	2010	August 2009
	£m	£m	£m
Deficit in schemes at the beginning of the period	(1,840)	(1,494)	(1,494)
Current service cost	(270)	(391)	(182)
Other finance cost	(13)	(48)	(26)
Contributions by employer	198	415	188
Foreign currency translation differences	(1)	(2)	-
Actuarial loss	(60)	(320)	(432)
Deficit in schemes at the end of the period	(1,986)	(1,840)	(1,946)

NOTE 8 Reconciliation of profit before tax to net cash generated from operations

	26 weeks ended28 August 2010	26 weeks ended29 August 2009Restated*
	£m	£m
Profit before tax	1,596	1,419
Net finance costs	164	205
Share of post-tax profits of joint ventures and associates	(13)	(22)
Operating profit	1,747	1,602
Depreciation and amortisation	702	720
Profit arising on property-related items	(261)	(235)
Profit arising on sale of non property-related items	1	-
Impairment of goodwill	55	82
Adjustment for non-cash element of pension charges	72	(6)
Share-based payments	112	123
(Increase)/decrease in inventories	(270)	99
Increase in trade and other receivables	(126)	(96)
Increase in trade and other payables	283	140
Tesco Bank increase in loans and advances to customers	(362)	(408)
Tesco Bank (increase)/decrease in loans and advances to banks,other financial assets and trade and other receivables	(158)	208
Tesco Bank increase in customer and bank deposits, trade andother payables and other financial liabilities including
borrowings	465	15
Increase in working capital	(168)	(42)
Cash generated from operations	2,260	2,244

* See Note 1 Basis of preparation

NOTE 9 Analysis of changes in net debt

	At 28February2010*	TescoBankAt 28February2010	Cashflow	Businesscombinations	Othernon-cashmovements	Eliminationof TescoBank	At 28August2010*
	£m	£m	£m	£m	£m	£m	£m
Cash and cash equivalents	2,615	204	(803)	-	(39)	(209)	1,768
Short-term investments	1,314	-	(136)	-	-	-	1,178
Joint venture loan and other
receivables	320	-	(10)	-	(1)	(8)	301
Derivative financialinstruments and other
financial assets	1,472	2	(262)	-	408	(7)	1,613
Cash and receivables	5,721	206	(1,211)	-	368	(224)	4,860
Bank and other borrowings	(1,228)	(256)	86	-	(209)	256	(1,351)
Finance lease payables	(45)	-	20	(6)	(27)	-	(58)
Derivative financial
instruments	(132)	(14)	66	-	(142)	9	(213)
Debt due within one year
	(1,405)	(270)	172	(6)	(378)	265	(1,622)
Bank and other borrowings	(11,356)	(224)	973	-	242	224	(10,141)
Finance lease payables	(164)	-	-	-	19	-	(145)
Derivative financial
instruments	(725)	(51)	40	-	97	60	(579)
Debt due after one year	(12,245)	(275)	1,013	-	358	284	(10,865)
	(7,929)	(339)	(26)	(6)	348	325	(7,627)

*These amounts relate to the net debt excluding Tesco Bank.

Note 10 Business combinations and other acquisitions

Business combinations

On 18 June 2010 the Group acquired the trade and certain assets and liabilities of 2 Sisters Food Group, Inc. for consideration of £52m. On 19 July 2010 the Group acquired 100% of the ordinary share capital of Wild Rocket Foods, LLC for consideration of £64m. The table below sets out the provisional analysis of the net assets acquired and the fair value to the Group in respect of these two acquisitions.

	Pre-acquisition	Fair value	Provisional fair values
	carrying values	adjustment	on acquisition
	£m	£m	£m
Non-current assets	45	(4)	41
Current assets	9	(1)	8
Current liabilities	(6)	(1)	(7)
Non-current liabilities	(8)	-	(8)
Net assets acquired	40	(6)	34
Goodwill arising on acquisition			82
			116
Consideration:
Cash			45
Non-cash			71
Total consideration			116

The goodwill represents the benefit of supply chain efficiencies, production economies, the ability to develop new and innovative products and further third-party revenue potential.

Note 10 Business combinations and other acquisitions (continued)

Other acquisitions

On 18 May 2010 the Group acquired an additional 13% of the ordinary share capital of Greenergy International Limited for a cash consideration of £16m taking the Group's holding to 34%.

On 21 June 2010 the Group completed the acquisition of the remaining 10% of the ordinary share capital of dunnhumby Limited for a cash consideration of £44m. The difference between the fair value of consideration paid and the adjustment to non-controlling interests has been recorded in equity.

Note 11 Related party transactions

i) Trading transactions and balances

	parties	Sales to related	related parties	Purchases from		Amounts owed byrelated parties	related parties	Amounts owed to
	2010	2009	2010	2009	2010	2009	2010	2009
	£m	£m	£m	£m	£m	£m	£m	£m
Joint ventures	96	77	213	161	7	10	27	20
Associates	-	-	607	389	-	-	34	101

Sales to related parties consist of services/management fees and loan interest.

Purchases from related parties include £133m (last interim period - £101m) of rentals payable to the Group's joint ventures, including those joint ventures formed as part of the sale and lease back programme.

ii) Non-trading transactions and balances

	of assets	Sale and leaseback	parties	Loans to related	parties	Loans from related	Injections ofequity funding
	2010	2009	2010	2009	2010	2009	2010	2009
	£m	£m	£m	£m	£m	£m	£m	£m
Joint ventures	958	458	304	297	23	24	-	6
Associates	-	-	-	-	-	-	16	-

On 7 July 2010, the Group formed a limited partnership with Tesco Pension Trustees. The limited partnerships contain 41 stores which have been sold from and leased back to the Group. The Group sold assets for proceeds of £958m to the limited partnership. The Group's share of the profit realised from this transaction is included within profit arising on property-related items.

Note 11 Related party transactions (continued)

iii) Transactions with key management personnel

Only members of the Board of Directors of Tesco PLC are deemed to be key management personnel. It is the Board who have the responsibility for planning, directing and controlling the activities of the Group.

Transactions on an arm's length basis with Tesco Bank were as follows:

	Credit cards and personal loan balances		Saving deposit accounts
	Number of key managementpersonnel	£m	Number of keymanagementpersonnel	£m
At 28 August 2010	9	-	7	-
At 29 August 2009	2	-	4	-

There were no other material transactions of balances between the Group and its key management personnel or their close family members.

Note 12 Contingent liabilities

Tesco Bank

At 28 August 2010, Tesco Bank has commitments of formal standby facilities, credit lines and other commitments to lend, totalling £6.7bn (last interim period £6.2bn). The amount is intended to provide an indication of the volume of business transacted and not for the underlying credit or other risks.

The FSCS meets its obligations by raising management expense levies. These include amounts to cover the interest on its borrowings and compensation levies on the industry. Each deposit-taking institution contributes in proportion to its share of total protected deposits. The levy is calculated based on deposit balances held as at 31 December in each year and as such, this is seen as the 'trigger event' under accounting rules.

Independent auditors' report to the members of Tesco PLC

We have audited the Group financial statements of Tesco PLC for the 52 weeks ended 26 February 2011 which comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group Balance Sheet, the Group Cash Flow Statement, the Group Statement of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Respective responsibilities of directors and auditors

As explained more fully in the Statement of Directors' responsibilities set out on page 92, the Directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements.

Opinion on financial statements

In our opinion the Group financial statements:

give a true and fair view of the state of the Group's affairs as at 26 February 2011 and of its profit and cash flows for the 52 weeks then ended;
have been properly prepared in accordance with IFRSs as adopted by the European Union; and
have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation.

Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors' Report for

the 52 weeks ended 26 February 2011 for which the Group financial statements are prepared is consistent with the Group financial statements.

Matters on which we are required to report by exception We have nothing to report in respect of the following:

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

certain disclosures of Directors' remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:

the Directors' statement, set out on page 45, in relation to going concern;
the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the June 2008 Combined Code specified for our review; and
certain elements of the report to shareholders by the Board on directors' renumeration.

Other matter

We have reported separately on the Parent Company financial statements of Tesco PLC for the 52 weeks ended 26 February 2011 and on the information in the Directors' Remuneration Report that is described as having been audited.

Richard Winter (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 6 May 2011

Group income statement

		52 weeks2011	52 weeks2010
Year ended 26 February 2011	notes	£m	£m
Continuing operations
Revenue (sales excluding VAT)	2	60,931	56,910
Cost of sales		(55,871)	(52,303)
Gross profit		5,060	4,607
Administrative expenses		(1,676)	(1,527)
Profit arising on property-related items	3	427	377
Operating profit		3,811	3,457
Share of post-tax profits of joint ventures and associates	13	57	33
Finance income	5	150	265
Finance costs	5	(483)	(579)
Profit before tax	3	3,535	3,176
Taxation	6	(864)	(840)
Profit for the year		2,671	2,336
Attributable to:
Owners of the parent		2,655	2,327
Non-controlling interests		16	9
		2,671	2,336
Earnings per share
Basic	9	33.10p	29.33p
Diluted	9	32.94p	29.19p

Non-GAAP measure: underlying profit before tax	notes	52 weeks2011£m	52 weeks2010£m
Profit before tax		3,535	3,176
Adjustments for:
IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements	1/5	(19)	(151)
IAS 19 'Employee Benefits' – non-cash Group Income Statement charge for pensions	1/28	113	24
IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods	1	50	41
IFRS 3 'Business Combinations' – intangible asset amortisation charges and costs arising from acquisitions	1	42	127
IFRIC 13 'Customer Loyalty Programmes' – fair value of awards	1	8	14
IAS 36 'Impairment of Assets' – impairment of goodwill arising on acquisitions	1	55	131
Restructuring costs	1	29	33
Underlying profit before tax	1	3,813	3,395

Group statement of comprehensive income

		52 weeks	52 weeks
Year ended 26 February 2011	notes	2011£m	2010£m
Change in fair value of available-for-sale financial assets and investments		2	1
Currency translation differences		(344)	343
Actuarial gains/(losses) on defined benefit pension schemes	28	595	(322)
(Losses)/gains on cash flow hedges:
Net fair value losses		(22)	(168)
Reclassified and reported in the Group Income Statement		8	5
Tax relating to components of other comprehensive income for the year	6	(153)	54
Total other comprehensive income for the year		86	(87)
Profit for the year		2,671	2,336
Total comprehensive income for the year		2,757	2,249
Attributable to:
Owners of the parent		2,746	2,222
Non-controlling interests		11	27
		2,757	2,249

Group balance sheet

		26 February2011	27 February2010
Non-current assets	notes	£m	£m
Goodwill and other intangible assets	10	4,338	4,177
Property, plant and equipment	11	24,398	24,203

Investment property	12	1,863	1,731
Investments in joint ventures and associates	13	316	152
Other investments	14	1,108	863
Loans and advances to customers	17	2,127	1,844
Derivative financial instruments	22	1,139	1,250
Deferred tax assets	6	48	38
Current assets		35,337	34,258
Inventories	15	3,162	2,729
Trade and other receivables	16	2,314	1,888
Loans and advances to customers	17	2,514	2,268
Loans and advances to banks and other financial assets	18	404	144
Derivative financial instruments	22	148	224
Current tax assets		4	6
Short-term investments		1,022	1,314
Cash and cash equivalents	19	1,870	2,819
		11,438	11,392
Non-current assets classified as held for sale	7	431	373
		11,869	11,765
Current liabilities
Trade and other payables	20	(10,484)	(9,442)
Financial liabilities:
Borrowings	21	(1,386)	(1,529)
Derivative financial instruments and other liabilities	22	(255)	(146)
Customer deposits	24	(5,074)	(4,357)
Deposits by banks	25	(36)	(30)
Current tax liabilities		(432)	(472)
Provisions	26	(64)	(39)
		(17,731)	(16,015)
Net current liabilities		(5,862)	(4,250)
Non-current liabilities
Financial liabilities:
Borrowings	21	(9,689)	(11,744)
Derivative financial instruments and other liabilities	22	(600)	(776)
Post-employment benefit obligations	28	(1,356)	(1,840)
Deferred tax liabilities	6	(1,094)	(795)
Provisions	26	(113)	(172)
		(12,852)	(15,327)
Net assets		16,623	14,681
Equity
Share capital	29	402	399
Share premium account		4,896	4,801
Other reserves		40	40
Retained earnings		11,197	9,356
Equity attributable to owners of the parent		16,535	14,596
Non-controlling interests		88	85
Total equity		16,623	14,681

Group statement of changes in equity

							Attributable to owners of the parent
	Issuedsharecapital£m	Sharepremium£m	Otherreserves£m	Capitalredemptionreserve£m	Hedgingreserve£m	Translationreserve£m	Treasuryshares£m	Retainedearnings£m	Total£m	Non-controllinginterests£m	Totalequity£m
At 27 February 2010	399	4,801	40	13	12	463	(180)	9,048	14,596	85	14,681
Profit for the year	–	–	–	–	–	–	–	2,655	2,655	16	2,671
Other comprehensive income
Change in fair value of available-forsale financial assets	–	–	–	–	–	–	–	2	2	–	2
Currency translation differences	–	–	–	–	–	(339)	–	–	(339)	(5)	(344)
Actuarial gains on defined benefitpension schemes	–	–	–	–	–	–	–	595	595	–	595
Losses on cash flow hedges	–	–	–	–	(14)	–	–	–	(14)	–	(14)
Tax relating to components of othercomprehensive income	–	–	–	–	1	31	–	(185)	(153)	–	(153)
Total other comprehensive income	–	–	–	–	(13)	(308)	–	412	91	(5)	86
Total comprehensive income	–	–	–	–	(13)	(308)	–	3,067	2,746	11	2,757
Transactions with owners
Purchase of treasury shares	–	–	–	–	–	–	(50)	–	(50)	–	(50)
Share-based payments	–	–	–	–	–	–	89	131	220	–	220
Issue of shares	3	95	–	–	–	–	–	–	98	–	98
Purchase of non-controlling interests	–	–	–	–	–	–	–	6	6	(6)	–
Dividends paid to non-controllinginterests	–	–	–	–	–	–	–	–	–	(2)	(2)
Dividends authorised in the year	–	–	–	–	–	–	–	(1,081)	(1,081)	–	(1,081)
Total transactions with owners	3	95	–	–	–	–	39	(944)	(807)	(8)	(815)
At 26 February 2011	402	4,896	40	13	(1)	155	(141)	11,171	16,535	88	16,623

							Attributable to owners of the parent
	Issuedsharecapital£m	Sharepremium£m	Otherreserves£m	Capitalredemptionreserve£m	Hedgingreserve£m	Translationreserve£m	Treasuryshares£m	Retainedearnings£m	Total£m	Non-controllinginterests£m	Totalequity£m
At 28 February 2009	395	4,638	40	13	175	173	(229)	7,644	12,849	57	12,906
Profit for the year	–	–	–	–	–	–	–	2,327	2,327	9	2,336
Other comprehensive income
Change in fair value ofavailable-for-sale financial assets	–	–	–	–	–	–	–	1	1	–	1
Currency translation differences	–	–	–	–	–	325	–	–	325	18	343
Actuarial losses on defined benefitpension schemes	–	–	–	–	–	(2)		(320)	(322)	–	(322)
Losses on cash flow hedges	–	–	–	–	(163)	–	–	–	(163)	–	(163)
Tax relating to components of othercomprehensive income	–	–	–	–	–	(33)	–	87	54	–	54
Total other comprehensive income	–	–	–	–	(163)	290	–	(232)	(105)	18	(87)
Total comprehensive income	–	–	–	–	(163)	290	–	2,095	2,222	27	2,249
Transactions with owners
Purchase of treasury shares	–	–	–	–	–	–	(24)	–	(24)	–	(24)
Share-based payments	–	–	–	–	–	–	73	168	241	–	241
Issue of shares	4	163	–	–	–	–	–	–	167	–	167
Purchase of non-controlling interests	–	–	–	–	–	–	–	91	91	3	94
Dividends paid to non-controllinginterests	–	–	–	–	–	–	–	–	–	(2)	(2)
Dividends authorised in the year	–	–	–	–	–	–	–	(968)	(968)	–	(968)
Tax on items charged to equity	–	–	–	–	–	–	–	18	18	–	18
Total transactions with owners	4	163	–	–	–	–	49	(691)	(475)	1	(474)
At 27 February 2010	399	4,801	40	13	12	463	(180)	9,048	14,596	85	14,681

Group cash flow statement

Year ended 26 February 2011notes	52 weeks2011£m	52 weeks2010£m
Cash flows from operating activities
Cash generated from operations31	5,366	5,947
Interest paid	(614)	(690)
Corporation tax paid	(760)	(512)
Net cash from operating activities	3,992	4,745
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired	(89)	(65)
Proceeds from sale of property, plant and equipment	1,906	1,820
Purchase of property, plant and equipment and investment property	(3,178)	(2,855)
Proceeds from sale of intangible assets	3	4
Purchase of intangible assets	(373)	(163)
Increase in loans to joint ventures	(219)	(45)
Decrease in loans to joint ventures	25	–
Investments in joint ventures and associates	(174)	(4)
Investments in short-term and other investments	(1,264)	(1,918)
Proceeds from sale of short-term investments	1,314	1,233
Dividends received	62	35
Interest received	128	81
Net cash used in investing activities	(1,859)	(1,877)
Cash flows from financing activities
Proceeds from issue of ordinary share capital	98	167
Increase in borrowings	2,175	862
Repayment of borrowings	(4,153)	(3,601)
Repayment of obligations under finance leases	(42)	(41)
Dividends paid to equity owners	(1,081)	(968)
Dividends paid to non-controlling interests	(2)	(2)
Own shares purchased	(31)	(24)
Net cash from refinancing activities	(3,036)	(3,607)
Net decrease in cash and cash equivalents	(903)	(739)
Cash and cash equivalents at beginning of year	2,819	3,509
Effect of foreign exchange rate changes	(46)	49
Cash and cash equivalents at end of year19	1,870	2,819

Reconciliation of net cash flow to movement in net debt note

	52 weeks2011	52 weeks2010
Year ended 26 February 2011note	£m	£m
Net decrease in cash and cash equivalents	(903)	(739)
Investment in Tesco Bank	(446)	(230)
Elimination of net increase in Tesco Bank cash and cash equivalents	56	(167)
Debt acquired on acquisition	(17)	–
Net cash outflow to repay debt and lease financing	2,870	2,780
Dividend received from Tesco Bank	150	150
(Decrease)/increase in short-term investments	(292)	81
Increase in joint venture loan receivables	159	45
Other non-cash movements	(438)	(249)
Decrease in net debt in the year	1,139	1,671
Opening net debt32	(7,929)	(9,600)
Closing net debt32	(6,790)	(7,929)

NB. The reconciliation of net cash flow to movement in net debt note is not a primary statement and does not form part of the cash flow statement but forms part of the notes to the financial statements.

Notes to the Group financial statements

NOTE 1 ACCOUNTING POLICIES

General information

Tesco PLC is a public limited company incorporated and domiciled in the United Kingdom under the Companies Act 2006 (Registration number 445790). The address of the registered office is Tesco House, Delamare Road, Cheshunt, Hertfordshire, EN8 9SL, UK.

The financial year represents the 52 weeks ended 26 February 2011 (prior financial year 52 weeks ended 27 February 2010). For the UK, the Republic of Ireland and the US, the results are for the 52 weeks ended 26 February 2011 (prior financial year 52 weeks ended 27 February 2010). For all other operations, the results are for the calender year ended 28 February 2011 (year ended 28 February 2010).

As described in the Report of the Directors, the main activity of the Group is that of retailing and retailing services.

Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee (IFRIC) interpretations as endorsed by the European Union, and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The 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, customer loyalty programmes and pensions that have been measured at fair value.

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

Basis of consolidation

The 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.

Where necessary, adjustments are made to the financial statements of subsidiaries, joint ventures and associates to bring the accounting policies used in line with those of the Group.

Subsidiaries

A subsidiary is an entity whose operating and financing policies are controlled, directly or indirectly, by Tesco PLC.

The financial statements of subsidiaries are included in the consolidated 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

A joint venture is an entity in which the Group holds an interest on a long-term basis and which is jointly controlled by the Group and one or more other venturers under a contractual agreement.

An associate is an undertaking, not being a subsidiary or joint venture, over which the Group has significant influence and can participate in the financial and operating policy decisions of the entity.

The Group's share of the results of joint ventures and associates is included in the Group Income Statement 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.

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

Use of assumptions and estimates

The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and 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. Revisions to accounting estimates are recognised in accordance with IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors'.

Critical estimates and assumptions that are applied in the preperation of the consolidated financial statements include:

Depreciation and amortisation

The Group exercises judgement to determine useful lives and residual values of intangibles, property, plant and equipment and investment property. The assets are depreciated down to their residual values over their estimated useful lives.

Impairment

i) Impairment of goodwill

The Group tests annually whether goodwill has suffered any impairment in accordance with the accounting policy as set out below. The recoverable amount of the cash-generating units has been determined based on value in use calculations. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimate discount rates using pre-tax rates that reflect the current market assessment of the time value of money and country specific risks.

ii) Impairment of assets

The Group has determined each store as a separate cash-generating unit. Where there are indicators for impairment, the Group performs an impairment test.

Recoverable amounts for cash-generating units are based on the higher of value in use and fair value less costs to sell. Value in use is calculated from cash flow projections for five years using data from the Group's latest internal forecasts. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimate discount rates using pre-tax rates that reflect the current market assessment of the time value of money and country specific risks.

iii) Impairment of loans and advances to customers

The Group's loan impairment provisions are established to recognise incurred impairment losses in its portfolio of loans classified as loans and receivables and carried at amortised cost. A loan is impaired when there is objective evidence that events since the loan was granted have affected expected cash flows from the loan. The impairment loss is the difference between the carrying value of the loan and the present value of estimated future cash flows at the loan's original effective interest rate.

The Group's loan impairment provisions are established on a portfolio basis taking into account the level of arrears, security, past loss experience, credit scores and defaults based on portfolio trends. The most significant factors in establishing these provisions are the expected loss rates. These portfolios include credit card receivables and other personal advances. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, the unemployment level, payment behaviour and bankruptcy trends.

Governance

Overview

Notes to the Group financial statements

NOTE 1 ACCOUNTING POLICIES CONTINUED

Provisions

Provisions have been made for onerous leases, dilapidations, restructuring, pensions, customer redress and claims. These provisions are estimates and the actual costs and timing of future cash flows are dependent on future events. The difference between expectations and the actual future liability will be accounted for in the period when such determination is made.

The Group has a provision for potential customer redress. During the year, the FSA formally issued Policy Statement 10/12 (PS 10/12), which introduces new guidance in respect of PPI customer redress and evidential provisions to the FSA Handbook with an implementation date of 1 December 2010. We will continue to handle complaints and redress customers in accordance with PS 10/12. This will include ongoing analysis of historical claims experience in accordance with the guidance.

The calculation of this provision involves estimating a number of variables, principally the level of customer complaints which may be received and the level of any compensation which may be payable to customers. Uncertainty associated with these factors may result in the ultimate liability being different from the reported provision.

Insurance reserves

The Group recognises insurance commission arising from the sale of general insurance policies sold under the Tesco brand. The level of commission is dependent upon the profitability of the underlying insurance policies, which is in turn dependent on the level of reserves held by the insurance trading partner to underwrite the policies in place. Calculation of the required level of insurance claims reserves is dependent on a detailed actuarial review. Management also undertakes an assessment of other risks which are outside the scope of this review but that are inherent in assessing potential claims liabilities. A change in the estimate of any of the key variables in this calculation could have the potential to significantly impact the reserve balance recognised which would therefore also impact the insurance commission revenue recognised in the income statement.

Post-employment benefit obligations

The present value of the post-employment benefit obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost (income) for pensions include the discount rate. Any changes in these assumptions will impact the carrying amount of post-employment benefit obligations.

The Group determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the post-employment benefit obligations. In determining the appropriate discount rate, the Group considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related post-employment benefit obligation. Other key assumptions for post-employment benefit obligations are based in part on current market conditions. Additional information is disclosed in note 28.

Changes in accounting policy and disclosure

The Group has adopted the following new and amended standards and interpretations as of 28 February 2010:

• IFRS 3 (Revised) 'Business Combinations' is effective for periods beginning on or after 1 July 2009. The revised standard continues to apply the acquisition method to business combinations, but with certain significant changes. All payments to purchase a business will be recorded at fair value at the acquisition date, with some contingent payments subsequently remeasured at fair value through the Group Income Statement. Goodwill and non-controlling interests may be calculated on a gross or net basis. All transaction costs will be expensed.

IAS 27 (Revised) 'Consolidated and Separate Financial Statements' is effective for periods beginning on or after 1 July 2009. The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control. As such, transactions with non-controlling interests with no change in control will no longer result in recognition of goodwill in the Group Balance Sheet or gains and losses recognised in the Group Income Statement. The revised standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value and a gain or loss is recognised in the Group Income Statement.
IAS 39 (Amended) 'Financial Instruments: Recognition and Measurement' is effective for periods beginning on or after 1 July 2009. The amendment requires that inflation may only be hedged if changes in inflation are a contractually specified portion of cash flows of a recognised financial instrument. The amendment also permits an entity to designate purchased options as a hedging instrument in a hedge of a financial or non-financial item.

The Group has adopted all amendments published in 'Improvements to IFRSs' issued in April 2009. The adoption of these amendments has not had any significant impact on the amounts reported in these financial statements but may impact the accounting for future transactions and arrangements.

Revenue

Revenue comprises the fair value of consideration received or receivable for the sale of goods and services in the ordinary course of the Group's activities.

Sale of goods

Revenue is recognised when the significant risks and rewards of ownership of the goods have transferred to the buyer and the amount of revenue can be measured reliably.

Revenue is recorded net of returns, discounts/offers and value added taxes. Offers include: money-off coupons, conditional spend vouchers and offers such as buy one get one free (BOGOF) and 3 for 2.

Provision of services

Revenue from the provision of services is recognised when the service is provided and the revenue can be measured reliably, based on the terms of the contract.

Where the Group acts as an agent selling goods or services, only the commission income is included within revenue.

Financial services

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

Fees in respect of services (such as credit card interchange, late payment and balance transfer fees and ATM revenue) are recognised as the right to consideration accrues through the provision of the service to the customer. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable.

NOTE 1 ACCOUNTING POLICIES CONTINUED

The Group continues to receive insurance commission arising from the sale of insurance policies sold under the Tesco brand through the legacy arrangement with the Royal Bank of Scotland (RBS). This commission income is variable and dependent upon the profitability of the underlying insurance policies.

Clubcard, loyalty and other initiatives

The cost of Clubcard and loyalty initiatives is treated as a deduction from sales and part of the fair value of the consideration received is deferred and subsequently recognised over the period that the awards are redeemed.

Computers for Schools, Sport for Schools and Club vouchers are issued by Tesco for redemption by participating schools/clubs and are part of our overall Community Plan. The cost of the redemption (i.e meeting the obligation attached to the vouchers) is treated as a cost rather than a deduction from sales.

Rental income

Rental income is recognised in the period in which it is earned, in accordance with the terms of the lease.

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.

Dividend income

Dividends are recognised when a legal entitlement to receive payment arises.

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.

Business combinations and goodwill

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

The Group recognises intangible assets as part of business combinations at fair value on the date of acquisition. The determination of these fair values is based upon management's judgement and includes assumptions on the timing and amount of future incremental cash flows generated by the assets acquired and the selection of an appropriate cost of capital. The useful lives of intangible assets are estimated and amortisation is charged on a straight-line basis.

Goodwill arising on consolidation represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets/net liabilities of the acquired subsidiary, joint venture or associate at the date of acquisition. If the cost of acquisition is less than the fair value of the Group's share of the net assets/net liabilities of the acquired entity (i.e a discount on acquisition), 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 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.

Goodwill arising on acquisitions before 29 February 2004 (the date of transition to IFRS) was retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been restated and will not be included in determining any subsequent profit or loss on disposal.

Intangible assets

2%-100% of cost per annum.

Acquired intangible assets Acquired intangible assets, such as software, pharmacy licences, customer relationships, contracts and brands, are measured initially at cost and are amortised on a straight-line basis over their estimated useful lives, at

Internally-generated intangible assets – Research and development expenditure

Research costs are expensed as incurred.

Development expenditure incurred on an individual project is capitalised only if all the criteria set out in IAS 38 'Intangible Assets' are met, principally:

an asset is created that can be identified (such as software or new processes);
it is probable that the asset created will generate future economic benefits; and
the development cost of the asset can be measured reliably.

Following the initial recognition of development expenditure, the cost is amortised over the project's estimated useful life, usually at 14%-25% of cost per annum.

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.

The following depreciation rates are applied for the Group:

freehold and leasehold buildings with greater than 40 years unexpired at 2.5% of cost;
leasehold properties with less than 40 years unexpired are depreciated by equal annual instalments over the unexpired period of the lease; and
plant, equipment, fixtures and fittings and motor vehicles at rates varying from 9% to 50%.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, when shorter, over the term of the relevant lease.

Impairment of non-financial assets

Goodwill is reviewed for impairment at least annually by assessing the recoverable amount of each cash-generating unit to which the goodwill relates. The recoverable amount is the higher of fair value less costs to sell, and value in use. When the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Any impairment is recognised immediately in the Group Income Statement and is not subsequently reversed.

Business review

Overview

Governance

Notes to the Group financial statements

NOTE 1 ACCOUNTING POLICIES CONTINUED

Where an impairment loss 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 is property held to earn rental income and/or for capital appreciation rather than for the purpose of Group operating activities. 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 owner-occupied property.

Other investments

Other investments in the Group Balance Sheet comprise loan receivables and available-for-sale financial assets.

Loan receivables are recognised at amortised cost and available-for-sale financial assets are recognised at fair value.

Refer to the financial instruments accounting policy for further detail.

Inventories

Short-term investments

Short-term investments in the Group Balance Sheet consist of deposits with money market funds.

Cash and cash equivalents

Cash and cash equivalents in the Group Balance Sheet consist of cash at bank, in hand and demand deposits with banks together with short-term deposits with an original maturity of three months or less.

Non-current assets held for sale

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Leasing

The Group as a lessor

Rental income from operating leases is recognised on a straight-line basis over the term of the lease.

The Group as a lessee

Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability is included in the Group Balance Sheet as a finance lease obligation. Lease payments are apportioned between finance charges and a reduction of the lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the Group Income Statement.

Rentals payable under operating leases are charged to the Group Income Statement on a straight-line basis over the term of the lease.

Sale and leaseback

For sale and finance leasebacks, any profit from the sale is deferred and amortised over the lease term. For sale and operating leasebacks, generally the assets are sold at fair value, and accordingly the profit or loss from the sale is recognised immediately in the Group Income Statement.

Post-employment and similar obligations

The Group accounts for pensions and other post-employment benefits (principally private healthcare) under IAS 19 'Employee Benefits'.

For defined benefit plans, obligations are measured at discounted present value (using the projected unit credit method) whilst 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.

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

Share-based payments

Employees of the Group receive part of their remuneration in the form of share-based payment transactions, whereby employees render services in exchange for shares, rights over shares (equity-settled transactions) or in exchange for cash.

The fair value of employee share option plans is calculated at the grant date using the Black-Scholes 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.

NOTE 1 ACCOUNTING POLICIES CONTINUED

Current tax is the expected tax payable on the taxable income for the 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 Other Comprehensive Income or directly in the Group Statement of Changes in Equity, in which case it is recognised in the Group Statement of Other Comprehensive Income or directly in the Group Statement of Changes in Equity, respectively.

Deferred tax is calculated at 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 equity or other comprehensive income, 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.

Foreign currencies

The financial statements of foreign subsidiaries are translated into Pounds Sterling. Since the majority of consolidated companies operate as independent entities within their local economic environment, their respective local currency is the functional currency. Therefore, assets and liabilities of overseas subsidiaries denominated in foreign currencies are translated at exchange rates prevailing at the date of the Group Balance Sheet; 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 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 on the Group's Balance Sheet when the Group becomes a party to the contractual provisions of the instrument.

Trade receivables

Trade receivables are non interest-bearing and are recognised initially at fair value, and subsequently at amortised cost using the effective interest rate method, less provision for impairment.

Investments

Investments are recognised at trade date. Investments are classified as either held for trading or available-for-sale, and are recognised at fair value. There are no investments classified as held for trading.

For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the net result for the period. Interest calculated using the effective interest rate method is recognised in the Group Income Statement. Dividends on an available-forsale equity instrument are recognised in the Group Income Statement when the entity's right to receive payment is established.

Loans and advances to customers and banks

Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and include amounts due from customers and amounts due from banks. The Group has no intention of trading these loans and advances and consequently they are not classified as held for trading or designated as fair value through profit and loss. 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 impairment losses. Income from these financial assets is calculated on an effective yield basis and is recognised in the Group Income Statement.

Impairment of loans and advances to customers and banks

Impairment losses are recognised in the Group Income Statement and the carrying amount of the financial asset or group of financial assets is reduced by establishing an allowance for impairment losses. If in a subsequent period the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.

Overview

Notes to the Group financial statements

NOTE 1 ACCOUNTING POLICIES CONTINUED

materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, the unemployment level, payment behaviour and bankruptcy trends.

Financial liabilities and equity instruments

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 cost 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 stated at amortised cost.

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

Derivative financial instruments are recognised and stated at fair value. The fair value of derivative financial instruments is determined by reference to market values for similar financial instruments, by discounted cash flows, or by the use of option valuation models. 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.

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

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 and qualify as fair value hedges are recorded in the Group Income Statement, together with any changes in the fair value of the hedged item that is attributable to the hedged risk.

Derivative financial instruments qualifying for fair value hedge accounting are principally interest rate swaps and cross currency swaps.

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 instrument is recognised directly in equity.

The associated cumulative gain or loss is reclassified from the Group Statement of Changes in Equity and recognised in the Group Income Statement in the same period or periods during which the hedged transaction affects the Group Income Statement. The classification of the effective portion when recognised in the Group Income Statement is the same as the classification of the hedged transaction. Any element of the remeasurement of the derivative instrument which does not meet the criteria for an effective hedge is recognised immediately in the Group Income Statement within finance income or costs.

Derivative instruments qualifying for cash flow hedging are principally forward foreign exchange transactions and interest rate swaps.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in the Group Statement of Changes in Equity until the forecasted transaction occurs or the original hedged item affects the Group Income Statement. If a forecasted hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in the Group Statement of Changes in Equity is reclassified to the Group Income Statement.

Net investment hedging

Derivative 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 derivative instrument is recognised directly in the Group Statement of Changes in Equity. Any ineffective element is recognised immediately in the Group Income Statement. Gains and losses accumulated in the Group Statement of Changes in Equity are included in the Group Income Statement when the foreign operation is disposed of.

Derivative instruments designated as net investment hedges are principally forward foreign exchange transactions.

Treatment of agreements to acquire non-controlling interests The Group has entered into a number of agreements to purchase the remaining shares of subsidiaries with non-controlling interests.

Under IAS 32 'Financial Instruments: Presentation', the net present value of the expected future payments are shown as a financial liability. At the end of each period, the valuation of the liability is reassessed with any changes recognised in the Group Income Statement within finance income or costs. Where the liability is in a currency other than Pounds Sterling, the liability has been designated as a net investment hedge. Any change in the value of the liability resulting from changes in exchange rates is recognised directly in equity.

Provisions

Provisions are recognised when there is a present legal or constructive obligation as a result of a past event, for which it is probable that a transfer of economic benefits will be required to settle the obligation and where a reliable estimate can be made of the amount of the obligation.

Provisions for onerous leases are recognised when the Group believes that the unavoidable costs of meeting the lease obligations exceed the economic benefits expected to be received under the lease. Where material, these leases are discounted to their present value. Provisions for dilapidation costs are recognised on a lease by lease basis.

Other recent accounting developments

NOTE 1 ACCOUNTING POLICIES CONTINUED

IFRIC 17 'Distributions of Non-cash Assets to Owners' is effective from periods commencing on or after 1 July 2009. It provides guidance on the appropriate accounting treatment when an entity distributes assets other than cash as dividends to its shareholders.
IFRIC 18 'Transfers of Assets from Customers' is effective from periods commencing on or after 1 July 2009. It concludes that when an item of property, plant and equipment transferred meets the definition of an asset from the perspective of the recipient, the recipient should recognise the asset at its fair value on the date of the accordance with IAS 18 'Revenue'.

As of the date of authorisation of these financial statements, the following standards were in issue but not yet effective. The Group has not applied these standards in the preparation of the financial statements:

IFRS 9 'Financial Instruments' is effective from periods commencing on or after 1 January 2013. It adds guidance on the classification and measurement of financial assets and liabilities. It only permits the recognition of fair value gains and losses in other comprehensive income if they relate to equity investments that are not held for trading.
IAS 24 (Amended) 'Related party disclosures' is effective from periods commencing on or after 1 January 2011. It clarifies and simplifies the definition of a related party and will require certain entities to make additional disclosures.
IFRIC 14 (Amended) 'Prepayments of a minimum funding requirement' is effective from periods commencing on or after 1 January 2011. It corrects an unintended consequence where in some circumstances entities are not entitled to recognise as an asset some voluntary prepayments for minimum funding contributions.
IFRIC 19 'Extinguishing financial liabilities and equity instruments' is effective from periods commencing on or after 1 July 2010. It requires that where a debtor issues equity instruments to a creditor to settle all or part of a financial liability, these instruments should be deemed fully paid and measured at the fair value of the liability extinguished.

The impact on the Group's financial statements of the future adoption of these standards is still under review. Other than IFRS 9, where the Group is continuing to assess the materiality of the impact of this new standard, the Group does not expect any of the changes to have material effect on the result or net assets of the Group.

Use of non-GAAP profit measures – underlying profit before tax The Directors believe that underlying profit before tax and underlying diluted earnings per share measures provide additional useful information for shareholders on underlying trends and performance. These measures are used for internal performance analysis. Underlying profit is not defined by IFRS and therefore may not be directly comparable with other companies' adjusted profit measures. It is not intended to be a substitute for, or superior to IFRS measurements of profit.

The adjustments made to reported profit before tax are:

• IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements. Under IAS 32 and IAS 39, the Group applies hedge accounting to its various hedge relationships when allowed under the rules of IAS 39 and when practical to do so. Sometimes the Group is unable to apply hedge accounting to the arrangements but continues to enter into these arrangements as they provide certainty or active management of the exchange rates and interest rates applicable to the Group. The Group believes these arrangements remain effective and economically and commercially viable hedges despite the inability to apply hedge accounting.

Where hedge accounting is not applied to certain hedging arrangements, the reported results reflect the movement in fair value of related derivatives due to changes in foreign exchange and interest rates. In addition, at each year end, any gain or loss accruing on open contracts is recognised in the Group Income Statement for the financial year, regardless of the expected outcome of the hedging contract on termination. This may mean that the Group Income Statement charge is highly volatile, whilst the resulting cash flows may not be as volatile. The underlying profit measure removes this volatility to help better identify underlying business performance.

IAS 19 'Employee Benefits' non-cash Income Statement charge for pensions. Under IAS 19 the cost of providing pension benefits in the future is discounted to a present value at the corporate bond yield rates applicable on the last day of the previous financial year. Corporate bond yield rates vary over time which in turn creates volatility in the Group Income Statement and Group Balance Sheet. IAS 19 also increases the charge for young pension schemes, such as Tesco's, by requiring the use of rates which do not take into account the future expected returns on the assets held in the pension scheme which will fund pension liabilities as they fall due. The sum of these two effects can make the IAS 19 charge disproportionately higher and more volatile than the cash contributions the Group is required to make in order to fund all future liabilities. Therefore, within underlying profit we have included the 'normal' cash contributions for pensions but excluded the volatile element of IAS 19 to represent what the Group believes to be a fairer measure of the cost of providing postemployment benefits.
IAS 17 'Leases' impact of annual uplifts in rent and rent-free periods. The amount charged to the Group Income Statement in respect of operating lease costs and incentives is expected to increase significantly as the Group expands its international business. The leases have been structured in a way to increase annual lease costs as the businesses expand. IAS 17 requires the total cost of a lease to be recognised on a straight-line basis over the term of the lease, irrespective of the actual timing of the cost. This adjustment also impacts the Group's operating profit and rental income within the share of post-tax profits of joint ventures and associates.
IFRS 3 (Revised) 'Business Combinations' intangible asset amortisation charges and costs arising from acquisitions. Under IFRS 3 intangible assets are separately identified and fair valued. The intangible assets are required to be amortised on a straight-line basis over their useful economic lives and as such is a non-cash charge that does not reflect the underlying performance of the business acquired. Similarly, the standard requires all acquisition costs to be expensed in the Group Income Statement. Due to their nature, these costs have been excluded from underlying profit as they do not reflect the underlying performance of the Group.
IFRIC 13 'Customer Loyalty Programmes' fair value of awards. The interpretation requires the fair value of customer loyalty awards to be measured as a separate component of a sales transaction. The underlying profit measure removes this fair value allocation to present underlying business performance, and to reflect the performance of the operating segments as measured by management.
IAS 36 'Impairment of Intangibles' impairment of goodwill arising on acquisitions. The remaining carrying value of goodwill relating to Japan was not fully recoverable and was fully impaired during the year. The resulting non-cash charge does not reflect the underlying performance of the business.
Restructuring costs. These relate to certain costs associated with the Group's restructuring activities and have been excluded from underlying profit as they do not reflect the Group's underlying performance.

Financial statements

Overview

Business review

Governance

Notes to the Group financial statements

NOTE 2 SEGMENTAL REPORTING

The Group's reporting 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 Executive Committee of the Board of Directors as it is primarily responsible for the allocation of resources to segments and the assessment of performance of the segments. The CODM uses trading profit, as reviewed at monthly Executive Committee meetings, as the key measure of the segments' results as it reflects the segments' underlying trading performance for the financial year under evaluation. Trading profit is a consistent measure within the Group.

Segmental trading profit is an adjusted measure of operating profit, which measures the performance of each segment before goodwill impairment and restructuring charges, profit arising on property-related items, impact on leases of annual uplifts in rent and rent-free periods, intangible asset amortisation charges and costs arising from acquisitions, adjustments for the fair value of customer loyalty awards and replaces the IAS 19 pension charge with the 'normal' cash contributions for pensions. Segment assets include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated is comprised mainly of derivative financial instruments and deferred tax assets.

Inter-segment revenue between the operating segments is not material.

The segment results, the reconciliation of the segment measures to the respective statutory items included in the Group Income Statement and the segment assets are as follows:

						Total at		Total
Year ended 26 February 2011	UK	Asia	Rest ofEurope	US	TescoBank	constantexchange	Foreignexchange	at actualexchange
At constant exchange rates	£m	£m	£m	£m	£m	£m	£m	£m
Continuing operations
Sales inc. VAT (excluding IFRIC 13)	44,570	9,952	10,741	489	919	66,671	902	67,573
Revenue (excluding IFRIC 13)	40,765	9,277	9,347	482	919	60,790	860	61,650
Effect of IFRIC 13	(649)	(34)	(34)	–	–	(717)	(2)	(719)
Revenue	40,116	9,243	9,313	482	919	60,073	858	60,931
Trading profit/(loss)	2,505	517	539	(181)	264	3,644	35	3,679
Trading margin*	6.1%	5.6%	5.8%	(37.6%)	28.7%	6.0%		6.0%
Year ended 26 February 2011At actual exchange rates	UK£m	Asia£m	Rest ofEurope£m	US£m	TescoBank£m			Totalat actualexchange£m
Continuing operations
Sales inc. VAT (excluding IFRIC 13)	44,571	11,023	10,558	502	919			67,573
Revenue (excluding IFRIC 13)	40,766	10,278	9,192	495	919			61,650
Effect of IFRIC 13	(649)	(37)	(33)	–	–			(719)
Revenue	40,117	10,241	9,159	495	919			60,931
Trading profit/(loss)	2,504	570	527	(186)	264			3,679
Trading margin*	6.1%	5.5%	5.7%	(37.6%)	28.7%			6.0%
Year ended 27 February 2010At constant exchange rates	UK£m	Asia£m	Rest ofEurope£m	US£m	TescoBank£m	Total atconstantexchange£m	Foreignexchange£m	Totalat actualexchange£m
Continuing operations
Sales inc. VAT (excluding IFRIC 13)	42,254	8,737	9,979	324	860	62,154	383	62,537
Revenue (excluding IFRIC 13)	39,104	8,148	8,704	319	860	57,135	367	57,502
Effect of IFRIC 13	(546)	(25)	(19)	–	–	(590)	(2)	(592)
Revenue	38,558	8,123	8,685	319	860	56,545	365	56,910
Trading profit/(loss)	2,413	422	466	(151)	250	3,400	12	3,412
Trading margin*	6.2%	5.2%	5.4%	(47.3%)	29.1%	5.9%		5.9%
Year ended 27 February 2010At actual exchange ratesContinuing operations	UK£m	Asia£m	Rest ofEurope£m	US£m	TescoBank£m			Total atactualexchange£m
Sales inc. VAT (excluding IFRIC 13)	42,254	9,072	9,997	354	860			62,537
Revenue (excluding IFRIC 13)	39,104	8,465	8,724	349	860			57,502
Effect of IFRIC 13	(546)	(26)	(20)	–	–			(592)
Revenue	38,558	8,439	8,704	349	860			56,910
Trading profit/(loss)

Trading margin*	2,4136.2%	4405.2%	4745.4%	(165)(47.3%)	25029.1%			3,4125.9%

* Trading margin is based on revenue excluding IFRIC 13.

NOTE 2 SEGMENTAL REPORTING CONTINUED

Reconciliation of trading profit to profit before tax

	2011£m	2010£m
Trading profit	3,679	3,412
Adjustments:
Profit arising on property-related items	427	377
IAS 19 'Employee Benefits' – non-cash Group Income Statement charge for pensions	(95)	24
IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods	(66)	(51)
IFRS 3 'Business Combinations' – intangibles asset amortisation charges and costs arising from acquisitions	(42)	(127)
IFRIC 13 'Customer Loyalty Programmes' – fair value of awards	(8)	(14)
IAS 36 'Impairment of Assets' – impairment of goodwill arising on acquisitions	(55)	(131)
Restructuring costs	(29)	(33)
Operating profit	3,811	3,457
Share of post-tax profit from joint ventures and associates	57	33
Finance income	150	265
Finance costs	(483)	(579)
Profit before tax	3,535	3,176
Taxation	(864)	(840)
Profit for the year	2,671	2,336

Segment assets

At 26 February 2011	UK£m	Asia£m	Rest ofEurope£m	US£m	TescoBank£m	Other/unallocated£m	Totalat actualexchange£m
Total segment non-current assets	14,456	7,638	6,601	945	4,510	1,187	35,337
Total segment non-current assets includes:
Investments in joint ventures and associates	79	173	–	–	64	–	316
At 27 February 2010	UK£m	Asia£m	Rest ofEurope£m	US£m	TescoBank£m	Other/unallocated£m	Totalat actualexchange£m
Total segment non-current assets	14,741	7,115	6,588	790	3,738	1,286	34,258
Total segment non-current assets includes:
Investments in joint ventures and associates	55	95	–	–	2	–	152

Financial statements

Business review

Governance

Overview

Notes to the Group financial statements

NOTE 2 SEGMENTAL REPORTING CONTINUED

Other segment information

			Rest of		Tesco	Totalat actual
Year ended 26 February 2011	UK£m	Asia£m	Europe£m	US£m	Bank£m	exchange£m
Capital expenditure (including acquisitions throughbusiness combinations):
Property, plant and equipment	1,486	977	603	192	62	3,320
Investment property	–	17	7	–	–	24
Goodwill and other intangible assets	159	28	23	82	163	455
Depreciation:
Property, plant and equipment	(607)	(273)	(263)	(40)	(11)	(1,194)
Investment property	–	(17)	(14)	–	–	(31)
Amortisation of intangible assets	(109)	(17)	(22)	–	(47)	(195)
Goodwill impairment losses recognised in theGroup Income Statement	–	(55)	–	–	–	(55)
Impairment losses recognised in the Group Income Statement	(14)	–	(3)	(8)	–	(25)
Reversal of prior year impairment losses through theGroup Income Statement	14	13	11	–	–	38
Year ended 27 February 2010	UK£m	Asia£m	Rest ofEurope£m	US£m	TescoBank£m	Totalat actualexchange£m
Capital expenditure (including acquisitions throughbusiness combinations):
Property, plant and equipment	1,485	736	518	141	44	2,924
Investment property	–	8	8	–	–	16
Goodwill and other intangible assets	124	91	21	–	25	261
Depreciation:
Property, plant and equipment	(570)	(226)	(260)	(29)	(6)	(1,091)
Investment property	–	(8)	(8)	–	–	(16)
Amortisation of intangible assets	(116)	(14)	(20)	–	(127)	(277)
Goodwill impairment losses recognised in theGroup Income Statement	–	(131)	–	–	–	(131)
Impairment losses recognised in the Group Income Statement	(27)	(6)	(18)	–	–	(51)
Reversal of prior year impairment losses through theGroup Income Statement	27	10	40	–	–	77

NOTE 3 INCOME AND EXPENSES

From continuing operations	2011£m	2010£m
Profit before tax is stated after charging/(crediting) the following:
Profit arising on property-related items	(427)	(377)
Rental income, of which £417m (2010 – £351m) relates to investment properties	(541)	(461)
Direct operating expenses arising on rental earning investment properties	122	103
Costs of inventories recognised as an expense	45,942	42,504
Stock losses	1,025	1,000
Depreciation of property, plant and equipment and investment property	1,225	1,107
Impairment of property, plant and equipment and impairment of investment property	25	51
Reversal of prior year impairment losses through the Group Income Statement	(38)	(77)
Amortisation of internally-generated development intangible assets	100	103
Amortisation of other intangibles	95	174
Operating lease expenses*	1,064	927

* Operating lease expenses include £53m (2010 – £83m) for hire of plant and machinery.

NOTE 3 INCOME AND EXPENSES CONTINUED

During the financial year the Group obtained the following services from the Group's auditor, PricewaterhouseCoopers LLP, and network firms:

	2011	2010
	£m	£m
Audit services
Fees payable to the Company's auditor for the audit of the Parent Company and Group financial statements	0.6	0.6
The audit of the accounts of the Company's subsidiaries pursuant to legislation	3.7	3.5
	4.3	4.1
Non-audit services
Fees payable to the Company's auditor and network firms for other services:
Other services pursuant to legislation	0.1	0.1
Other services relating to taxation	0.7	0.4
Other services relating to information technology	0.3	–
Other services relating to corporate finance transactions	–	0.1
All other services	0.6	0.6
Total auditor remuneration	6.0	5.3

In addition to the amounts shown above, the auditors received fees of £0.1m (2010 – £0.1m) for the audit of the main Group pension scheme.

A description of the work of the Audit Committee is set out in the Corporate Governance Report on page 62 and includes an explanation of how objectivity and independence is safeguarded when non-audit services are provided by PricewaterhouseCoopers LLP.

NOTE 4 EMPLOYMENT COSTS, INCLUDING DIRECTORS' REMUNERATION

	2011	2010
	£m	£m
Wages and salaries	5,467	5,057
Social security costs	470	435
Post-employment defined benefits (note 28)	528	391
Post-employment defined contributions (note 28)	14	12
Share-based payments expense (note 27)	289	300
	6,768	6,195

The average number of employees by operating segment during the financial year was:

		Average numberof employees		Average number offull-time equivalents
	2011	2010	2011	2010
UK	293,676	287,266	200,966	196,604
Asia	104,071	94,536	96,481	89,310
Rest of Europe	89,559	86,642	82,270	77,847
US	4,134	3,246	3,448	2,259
Tesco Bank	1,274	404	1,224	393
Total	492,714	472,094	384,389	366,413

Overview

Business review

Governance

Notes to the Group financial statements

NOTE 5 FINANCE INCOME AND COSTS

	2011£m	2010£m
Finance income
Bank interest receivable and similar income on cash and cash equivalents	131	114
IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements	19	151
Total finance income	150	265
Finance costs
Interest payable on short-term bank loans and overdrafts repayable within five years	(101)	(135)
Finance charges payable under finance leases and hire purchase contracts	(10)	(9)
GBP MTN	(233)	(240)
EUR MTN	(194)	(232)
USD MTN	(57)	(57)
Other MTNs	(17)	(13)
Capitalised interest (note 11)	147	155
Total finance costs (on historical cost basis)	(465)	(531)
Net pension finance cost (note 28)	(18)	(48)
Total finance costs	(483)	(579)

GBP MTNs

Interest payable on the 4% RPI GBP MTN 2016 includes £12m (2010 – £1m) of Retail Price Index (RPI) related amortisation. Interest payable on the 3.322% LPI GBP MTN 2025 includes £10m (2010 – £2m) of RPI related amortisation.

Interest payable on the 1.982% RPI GBP MTN 2036 includes £11m (2010 – £1m) of RPI related amortisation. During the financial year the Group redeemed £126m of the 5% GBP MTN maturing 2023. During the financial year the Group redeemed £127m of the 5% GBP MTN maturing 2042.

During the financial year the Group redeemed £221m of the 5.2% GBP MTN maturing 2057.

EUR MTNs

During the financial year the Group redeemed €111m of the 3.875% EUR MTN maturing 2011. During the financial year the Group redeemed €461m of the 5.875% EUR MTN maturing 2016.

NOTE 6 TAXATION

Recognised in the Group Income Statement

	2011£m	2010£m
Current tax expense
UK corporation tax	694	566
Foreign tax	181	128
Adjustments in respect of prior years	(114)	(91)
	761	603
Deferred tax expense
Origination and reversal of temporary differences	148	110
Adjustments in respect of prior years	12	124
Change in tax rate	(57)	3
	103	237
Total income tax expense	864	840

A number of changes to the UK corporation tax system were announced in the June 2010 Budget Statement. The Finance (No.2) Act 2010 included legislation to reduce the main rate of corporation tax from 28% to 27% from 1 April 2011. The proposed reduction from 28% to 27% was substantively enacted at the balance sheet date and has therefore been reflected in these Group financial statements.

In addition to the changes in rates of corporation tax disclosed above, a number of further changes to the UK corporation tax system were announced in the March 2011 UK Budget Statement. A resolution passed by Parliament on 29 March 2011 reduced the main rate of corporation tax to 26% from 1 April 2011. Legislation to reduce the main rate of corporation tax from 26% to 25% from 1 April 2012 is expected to be included in the Finance Act 2011. Further reductions to the main rate are proposed to reduce the rate by 1% per annum to 23% by 1 April 2014. None of these expected rate reductions had been substantively enacted at the balance sheet date and, therefore, are not reflected in these Group financial statements.

The effect of the changes enacted by Parliament on 29 March 2011 to reduce the corporation tax rate to 26%, with effect from 1 April 2011, is to reduce the deferred tax liability provided at the balance sheet date by £32m (£46m increase in profit and £14m decrease in the Group Statement of Comprehensive Income).

The effect of the changes expected to be enacted in the Finance Act 2011 to reduce the corporation tax rate from 26% to 25%, with effect from 1 April 2012, would be to reduce the deferred tax liability provided at the balance sheet date by a further £32m (£46m increase in profit and £14m decrease in the Group Statement of Comprehensive Income).

The proposed reductions of the main rate of corporation tax by 1% per year to 23% by 1 April 2014 are expected to be enacted separately each year. The overall effect of the further changes from 25% to 23%, if these applied to the deferred tax balance at the balance sheet date, would be to reduce the deferred tax liability by £66m (being £33m recognised in 2013 and £33m recognised in 2014).

NOTE 6 TAXATION CONTINUED

Reconciliation of effective tax charge

	2011	2010
	£m	£m
Profit before tax	3,535	3,176
Tax charge at 28% (2010 – 28%)	(990)	(889)
Effect of:
Non-deductible expenses	(136)	(13)
Differences in overseas taxation rates	99	93
Adjustments in respect of prior years	102	(33)
Share of profits of joint ventures and associates	4	5
Change in tax rate	57	(3)
Total income tax charge for the year	(864)	(840)
Effective tax rate	24.4%	26.4%

Tax on items credited directly to the Group Statement of Changes in Equity

	2011	2010
	£m	£m
Current tax credit on:
Share-based payments	7	15
Deferred tax (charge)/credit on:
Share-based payments	(7)	3
Total tax on items credited to Group Statement of Changes in Equity	–	18

Tax relating to components of the Group Statement of Comprehensive Income

	2011£m	2010£m
Current tax credit/(charge) on:
Foreign exchange movements	31	(33)
Fair value of movement on available-for-sale investments	(1)	–
Deferred tax (charge)/credit on:
Pensions	(184)	87
Fair value movements on cash flow hedges	1	–
Total tax on items (charged)/credited to Group Statement of Comprehensive Income	(153)	54

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:

	Property	Retirement		Short-term			Otherpre/post
	relateditems*£m	benefitobligation£m	Share-basedpayments£m	timingdifferences£m	Tax losses£m	FinancialInstruments£m	tax temporarydifferences£m	Total£m
At 28 February 2009	(1,247)	417	44	90	16	47	6	(627)
(Charge)/credit to theGroup Income Statement	(257)	7	9	(7)	21	(11)	1	(237)
Credit to Group Statement ofChanges in Equity	–	–	3	–	–	–	–	3
Credit to Group Statement ofComprehensive Income	–	87	–	–	–	–	–	87
Acquisition of subsidiaries	–	–	–	–	2	–	–	2
Foreign exchange and other movements	8	–	–	8	2	–	(3)	15
At 27 February 2010	(1,496)	511	56	91	41	36	4	(757)
(Charge)/credit to theGroup Income Statement	(101)	35	(2)	5	(10)	(33)	3	(103)
Charge to Group Statement ofChanges in Equity	–	–	(7)	–	–	–	–	(7)
Charge to Group Statement ofComprehensive Income	–	(184)	–	–	–	1	–	(183)
Foreign exchange and other movements	5	–	–	(2)	1	–	–	4
At 26 February 2011	(1,592)	362	47	94	32	4	7	(1,046)

* Property-related items include deferred tax liability on rolled over gains of £335m (2010 – £294m) and deferred tax assets of £70m (2010 – £nil) on capital losses of £260m (2010 – £342m). The remaining balance relates to accelerated tax depreciation.

F-61

Financial statements

Business review

Overview

Governance

Notes to the Group financial statements

NOTE 6 TAXATION CONTINUED

Certain deferred tax assets and liabilities have been offset and analysed as follows:

	2011£m	2010£m
Deferred tax assets	48	38
Deferred tax liabilities	(1,094)	(795)
	(1,046)	(757)

The deferred tax balance is considered to be non-current.

No deferred tax is recognised on the unremitted earnings of overseas subsidiaries and joint ventures, because the earnings are continually reinvested by the Group and no tax is expected to be payable on them in the foreseeable future. The temporary difference unrecognised at the year end amounted to £3.0bn (2010 – £2.7bn). The deferred tax on unremitted earnings at 26 February 2011 is estimated to be £90m (2010 – £50m) 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 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):

	2011	2010
	£m	£m
Deductible temporary differences	19	1
Tax losses	403	286
	422	287

As at 26 February 2011 the Group has unused trading tax losses of £1,309m (2010 – £1,019m) available for offset against future profits. A deferred tax asset has been recognised in respect of £109m (2010 – £142m) of such losses. No deferred tax asset has been recognised in respect of the remaining £1,200m (2010 – £877m) due to the unpredictability of future profit streams. Included in unrecognised tax losses are losses of £390m that will expire in 2015 (2010 – £297m in 2014) and £744m that will expire between 2016 and 2031 (2010 – £550m between 2015 and 2030). Other losses will be carried forward indefinitely.

NOTE 7 NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE

	2011£m	2010£m
Non-current assets classified as held for sale	431	373

The non-current assets classified as held for sale consist mainly of properties in the UK due to be sold within one year.

NOTE 8 DIVIDENDS

		2011		2010
	pence/share	£m	pence/share	£m
Amounts recognised as distributions to owners in the financial year:
Final dividend for the prior financial year	9.16	730	8.39	660
Interim dividend for the current financial year	4.37	351	3.89	308
	13.53	1,081	12.28	968
Proposed final dividend for the current financial year	10.09	812	9.16	731

The proposed final dividend was approved by the Board of Directors on 18 April 2011 and is subject to the approval of shareholders at the Annual General Meeting. The proposed dividend has not been included as a liability as at 26 February 2011, in accordance with IAS 10 'Events After the Balance Sheet Date'. It will be paid on 8 July 2011 to shareholders who are on the register of members at close of business on 3 May 2011.

NOTE 9 EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE

Basic earnings per share amounts are calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares in issue during the financial year.

Diluted earnings per share amounts are calculated by dividing the profit 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.

			2011			2010
		Potentiallydilutive			Potentiallydilutive
From continuing operations	Basic	share options	Diluted	Basic	share options	Diluted
Profit (£m)	2,655	–	2,655	2,327	–	2,327
Weighted average number of shares (millions)	8,020	41	8,061	7,933	39	7,972
Earnings per share (pence)	33.10	(0.16)	32.94	29.33	(0.14)	29.19

There have been no transactions involving ordinary shares between the reporting date and the date of approval of these financial statements which would significantly change the earnings per share calculations shown above.

Reconciliation of non-GAAP underlying diluted earnings per share

		2011		2010
	£m	pence/share	£m	pence/share
Profit	2,655	32.94	2,327	29.19
Adjustments for:
IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements	(19)	(0.23)	(151)	(1.90)
IAS 19 'Employee Benefits' – non-cash Group Income Statement charge for pensions	113	1.40	24	0.30
IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods	50	0.62	41	0.52
IFRS 3 'Business Combinations' – intangible asset amortisation charges andcosts arising from acquisitions	42	0.52	127	1.59
IFRIC 13 'Customer Loyalty Programmes' – fair value of awards	8	0.10	14	0.18
IAS 36 'Impairment of Assets' – impairment of goodwill arising on acquisitions	55	0.68	131	1.64
Restructuring costs	29	0.36	33	0.41
Tax effect of adjustments at the effective rate of tax (2011 – 24.1%*; 2010 – 25.4%)	(54)	(0.67)	(22)	(0.27)
Underlying earnings from operations	2,879	35.72	2,524	31.66

F-63

* The effective tax rate of 24.1% (2010 – 25.4%) excludes certain permanent differences on which tax relief is not available.

Financial statements

Overview

Business review

Governance

Notes to the Group financial statements

NOTE 10 GOODWILL AND OTHER INTANGIBLE ASSETS

	Internallygenerateddevelopmentcosts	Pharmacyandsoftwarelicences	Otherintangibleassets	Goodwill	Total
	£m	£m	£m	£m	£m
Cost
At 27 February 2010	1,133	368	335	3,566	5,402
Foreign currency translation	–	(5)	(2)	(48)	(55)
Additions	243	128	2	82	455
Reclassification	(74)	74	7	–	7
Disposals	(2)	(2)	–	–	(4)
At 26 February 2011	1,300	563	342	3,600	5,805
Accumulated amortisation and impairment losses
At 27 February 2010	574	242	180	229	1,225
Foreign currency translation	–	(5)	–	–	(5)
Amortisation for the year	100	52	43	–	195
Impairment losses for the year	–	–	–	55	55
Disposals	(2)	(1)	–	–	(3)
At 26 February 2011	672	288	223	284	1,467
Net carrying value
At 26 February 2011	628	275	119	3,316	4,338
At 27 February 2010	559	126	155	3,337	4,177

	Internallygenerateddevelopmentcosts	Pharmacyandsoftwarelicences	Otherintangibleassets	Goodwill	Total
	£m	£m	£m	£m	£m
Cost
At 28 February 2009	879	310	318	3,332	4,839
Foreign currency translation	9	11	14	136	170
Additions	111	50	2	98	261
Reclassification	136	(1)	1	1	137
Disposals	(2)	(2)	–	(1)	(5)
At 27 February 2010	1,133	368	335	3,566	5,402
Accumulated amortisation and impairment losses
At 28 February 2009	426	197	42	98	763
Foreign currency translation	3	6	3	1	13
Amortisation for the year	103	43	131	–	277
Reclassification	42	(3)	4	(1)	42
Impairment losses for the year	–	–	–	131	131
Disposals	–	(1)	–	–	(1)
At 27 February 2010	574	242	180	229	1,225
Net carrying value
At 27 February 2010	559	126	155	3,337	4,177
At 28 February 2009	453	113	276	3,234	4,076

There are no intangible assets, other than goodwill, with indefinite useful lives.

NOTE 10 GOODWILL AND OTHER INTANGIBLE ASSETS CONTINUED

Impairment of goodwill

Goodwill arising on business combinations is not amortised but is reviewed for impairment on an annual basis, or more frequently if there are indications that goodwill may be impaired. Goodwill acquired in a business combination is allocated to groups of cash-generating units according to the level at which management monitor that goodwill.

Recoverable amounts for cash-generating units are based on the higher of value in use and fair value less costs to sell. Value in use is calculated from cash flow projections for generally five years using data from the Group's latest internal forecasts, the results of which are reviewed by the Board. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimate discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. Changes in selling prices and direct costs are based on past experience and expectations of future changes in the market. Given the current economic climate, a sensitivity analysis has been performed in assessing the recoverable amounts of goodwill.

During the financial year, the remaining carrying amount of goodwill for Japan was reduced to nil through the recognition of an impairment loss of £55m (2010 – £131m). This has been included in cost of sales in the Group Income Statement.

The pre-tax discount rates used to calculate value in use range from 8% to 14% (2010 – 6% to 14%). On a post-tax basis, the discount rates ranged from 6% to 12% (2010 – 4% to 13%). These discount rates are derived from the Group's post-tax weighted average cost of capital, as adjusted for the specific risks relating to each geographical region.

The forecasts are extrapolated beyond five years based on estimated long-term average growth rates of 2% to 5% (2010 – 1% to 4%).

In February 2011 and 2010 impairment reviews were performed by comparing the carrying value of goodwill with the recoverable amount of the cash-generating units to which goodwill has been allocated.

The components of goodwill are as follows:

	2011	2010
	£m	£m
UK	645	645
Tesco Bank	802	802
Thailand	161	157
South Korea	468	489
Japan	–	55
China	582	594
Malaysia	83	77
Poland	401	424
Czech Republic	34	35
Turkey	50	54
US	78	–
Other	12	5
	3,316	3,337

Overview

Business review

Notes to the Group financial statements

NOTE 11 PROPERTY, PLANT AND EQUIPMENT

	Land andbuildings	Other(a)	Total
	£m	£m	£m
CostAt 27 February 2010	23,385	8,398	31,783
Foreign currency translation	(257)	(153)	(410)
Additions(b)	2,577	697	3,274
Acquisitions through business combinations	22	24	46
Reclassification	(673)	301	(372)
Classified as held for sale	(110)	–	(110)
Disposals	(1,465)	(176)	(1,641)
At 26 February 2011	23,479	9,091	32,570
Accumulated depreciation and impairment losses
At 27 February 2010	2,700	4,880	7,580
Foreign currency translation	(21)	(55)	(76)
Charge for the year	412	782	1,194
Impairment losses for the year	20	3	23
Reversal of impairment losses for the year	(38)	–	(38)
Reclassification	(199)	3	(196)
Classified as held for sale	(29)	–	(29)
Disposals	(140)	(146)	(286)
At 26 February 2011	2,705	5,467	8,172
Net carrying value(c)(d)(e)
At 26 February 2011	20,774	3,624	24,398
At 27 February 2010	20,685	3,518	24,203
Construction in progress included above(f)
At 26 February 2011	1,267	196	1,463

(a) Other assets consist of plant, equipment, fixtures and fittings and motor vehicles. (b) Includes £147m (2010 – £155m) in respect of interest capitalised, principally relating to land and building assets. The capitalisation rate used to determine the amount of finance costs capitalised during the financial year was 5.1% (2010 – 5.1%). Interest capitalised is deducted in determining taxable profit in the financial year in which it is incurred.

(i) Capitalised interest at 26 February 2011 of £1,084m (2010 – £1,012m (restated)). (ii) Assets held under finance leases which are analysed below:

		2011		2010
	Land andbuildings£m	Other(a)£m	Land andbuildings£m	Other(a)£m
Cost	139	580	139	582
Accumulated depreciationand impairment losses	(24)	(462)	(36)	(430)
Net carrying value	115	118	103	152

These assets are pledged as security for the finance lease liabilities.

(d) The net carrying value of land and buildings comprises:

	2011£m	2010£m
Freehold	18,094	17,855
Long leasehold – 50 years or more	677	971
Short leasehold – less than 50 years	2,003	1,859
Net carrying value	20,774	20,685

(e) Carrying value of land and buildings includes £2m (2010 – £3m) relating to the

prepayment of lease premiums.

(f) Construction in progress does not include land.

NOTE 11 PROPERTY, PLANT AND EQUIPMENT CONTINUED

	Land andbuildings£m	Other(a)£m	Total£m
Cost
At 28 February 2009	22,349	7,495	29,844
Foreign currency translation	793	234	1,027
Additions(b)	2,189	735	2,924
Reclassification	(279)	71	(208)
Classified as held for sale	2	4	6
Disposals	(1,669)	(141)	(1,810)
At 27 February 2010	23,385	8,398	31,783
Accumulated depreciation and impairment losses
At 28 February 2009	2,540	4,152	6,692
Foreign currency translation	80	121	201
Charge for the year	354	737	1,091
Impairment losses for the year	51	–	51
Reversal of impairment losses for the year	(74)	–	(74)
Reclassification	(34)	(48)	(82)
Classified as held for sale	(39)	1	(38)
Disposals	(178)	(83)	(261)
At 27 February 2010	2,700	4,880	7,580
Net carrying value(c)(d)(e)
At 27 February 2010	20,685	3,518	24,203
At 28 February 2009	19,809	3,343	23,152
Construction in progress included above(f)
At 27 February 2010	1,652	193	1,845

Impairment of property, plant and equipment

The Group has determined that for the purposes of impairment testing, each store is a cash-generating unit. Cash-generating units are tested for impairment if there are indications of impairment at the balance sheet date.

Recoverable amounts for cash-generating units are mainly based on value in use, which is generally calculated from cash flow projections for five to 20 years using data from the Group's latest internal forecasts, the results of which are reviewed by the Board. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimate discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. Changes in selling prices and direct costs are based on past experience and expectations of future changes in the market.

The forecasts are extrapolated beyond five years based on estimated long-term growth rates of 2% to 5% (2010 – 1% to 4%).

The pre-tax discount rates used to calculate value in use range from 6% to 14% (2010 – 6% to 14%) depending on the specific conditions in which each store operates. These discount rates are derived from the Group's post-tax weighted average cost of capital.

Overview

Business review

Governance

Notes to the Group financial statements

NOTE 11 PROPERTY, PLANT AND EQUIPMENT CONTINUED

The following amounts have been credited/(charged) to cost of sales in the Group Income Statement:

	2011£m	2010£m
Impairment losses
UK	(14)	(27)
Asia	–	(6)
Rest of Europe	(1)	(18)
US	(8)	–
	(23)	(51)
Reversal of impairment losses
UK	14	27
Asia	13	10
Rest of Europe	11	37
	38	74
Net reversal of impairment losses	15	23

The impairment losses relate to stores whose recoverable amounts do not exceed the asset carrying values. In all cases, impairment losses arose due to stores performing below forecasted trading levels.

The reversal of previous impairment losses arose principally due to improvements in stores' performances over the last year, which increased the net present value of future cash flows.

NOTE 12 INVESTMENT PROPERTY

	2011	2010
	£m	£m
Cost
At beginning of year	1,919	1,660
Foreign currency translation	(35)	172
Additions	24	16
Reclassification	197	71
Classified as held for sale	(2)	–
Disposals	(11)	–
At end of year	2,092	1,919
Accumulated depreciation and impairment losses
At beginning of year	188	121
Foreign currency translation	(3)	14
Charge for the year	31	16
Impairment losses for the year	2	–
Reversal of impairment losses for the year	–	(3)
Reclassification	11	40
At end of year	229	188
Net carrying value	1,863	1,731

NOTE 12 INVESTMENT PROPERTY CONTINUED

The following amounts have been (charged)/credited to cost of sales in the Group Income Statement:

	2011£m	2010£m
Impairment losses
Rest of Europe	(2)	–
	(2)	–
Reversal of impairment losses
Rest of Europe	–	3
	–	3
Net (impairment charge)/reversal of impairment losses	(2)	3

The impairment losses relate to malls whose recoverable amounts do not exceed the asset carrying values. In all cases, impairment losses arose due to the malls performing below forecasted trading levels.

The reversal of previous impairment losses arose principally due to improvements in the performance of malls over the last year, which increased the net present value of cash flows.

The estimated fair value of the Group's investment property is £4.4bn (2010 – £2.8bn). This fair value has been determined by applying an appropriate rental yield to the rentals earned by the investment property. A valuation has not been performed by an independent valuer.

NOTE 13 GROUP ENTITIES

Principal subsidiaries

The Group consolidates its subsidiary undertakings and its principal subsidiaries are:

		Share of issuedordinary share capital	Country of incorporationand principal country
	Business activity	and voting rights	of operation
Tesco Stores Limited	Retail	100%	England
One Stop Stores Limited(a)	Retail	100%	England
Tesco Ireland Limited	Retail	100%	Republic of Ireland
Tesco-Global Stores Privately Held Co. Limited	Retail	100%	Hungary
Tesco Polska Sp. z o.o.	Retail	100%	Poland
Tesco Stores C R a.s.	Retail	100%	Czech Republic
Tesco Stores S R a.s.	Retail	100%	Slovakia
Tesco Kipa Kitle Paza rlama Ticaret ve Gide Sanai A.S¸.(a)	Retail	93%	Turkey
Homeplus Co., Limited (formerly Samsung Tesco Co. Limited)	Retail	97%	South Korea
Homeplus Tesco Co., Limited (formerly Homever Tesco Co. Limited)	Retail	100%	South Korea
Ek-Chai Distribution System Co. Limited	Retail	86%(b)	Thailand
Tesco Stores (Malaysia) Sdn Bhd	Retail	70%	Malaysia
Tesco Japan Co., Limited	Retail	100%	Japan
Tesco Management (Shanghai) Corporation Limited	Retail	100%	People's Republic of China
Dobbies Garden Centres PLC	Retail	100%	Scotland
Fresh & Easy Neighborhood Market Inc	Retail	100%	US
Tesco Personal Finance Group Limited(a)
(trading as Tesco Bank)	Financial Services	100%	Scotland
Tesco Distribution Limited	Distribution	100%	England
Tesco Property Holdings Limited	Property	100%	England
Tesco International Sourcing Limited	Purchasing	100%	Hong Kong
dunnhumby Limited	Data Analysis	100%	England
ELH Insurance Limited	Self-insurance	100%	Guernsey
Valiant Insurance Company Limited	Self-insurance	100%	Republic of Ireland

(a) Held by the Parent Company (all other principal subsidiaries are held by an intermediate subsidiary).

(b) The Group has 86% of voting rights and 39% of issued ordinary share capital in Ek-Chai Distribution System Co. Limited.

The accounting period ends of the subsidiary undertakings consolidated in these financial statements are on or around 26 February 2011. A full list of the Group's subsidiary undertakings will be annexed to the next Annual Return filed at Companies House. There are no significant restrictions on the ability of subsidiary undertakings to transfer funds to the parent, other than those imposed by the Companies Act 2006.

Business review

Overview

Notes to the Group financial statements

NOTE 13 GROUP ENTITIES CONTINUED

Interests in joint ventures and associates

The Group uses the equity method of accounting for its interest in joint ventures and associates. The following table shows the aggregate movement in the Group's investment in joint ventures and associates:

	Joint ventures£m	Associates£m	Total£m
At 28 February 2009	49	13	62
Additions	83	–	83
Foreign currency translation	9	–	9
Share of post-tax profits of joint ventures and associates	29	4	33
Income received from joint ventures and associates	(34)	(1)	(35)
At 27 February 2010	136	16	152
Additions	88	86	174
Foreign currency translation	(5)	–	(5)
Share of post-tax profits/(losses) of joint ventures and associates	65	(8)	57
Income received from joint ventures and associates	(60)	(2)	(62)
At 26 February 2011	224	92	316

Significant joint ventures

The Group's principal joint ventures are:

		Share of issued sharecapital, loan capital and	Country of incorporationand principal country
	Business activity	debt securities	of operation
Shopping Centres Limited*	Property Investment	50%	England
BLT Properties Limited*	Property Investment	50%	England
Tesco British Land Property Partnership	Property Investment	50%	England
Tesco Red Limited Partnership	Property Investment	50%	England
Tesco Aqua Limited Partnership	Property Investment	50%	England
Tesco Jade Limited Partnership	Property Investment	50%	England
Tesco Coral Limited Partnership	Property Investment	50%	England
Tesco Blue Limited Partnership	Property Investment	50%	England
Tesco Atrato Limited Partnership	Property Investment	50%	England
Fushun Jinxiu Real Estate Development Co Limited	Property Investment	50%	People's Republic of China
Anshan Real Estate Development Co Limited	Property Investment	50%	People's Republic of China
Tesco Qinhuangdo Property Limited	Property Investment	50%	People's Republic of China
Arena (Jersey) Management Limited	Property Investment	50%	Jersey
The Tesco Property Limited Partnership	Property Investment	50%	England
The Tesco Property (No. 2) Limited Partnership	Property Investment	50%	Jersey
The Tesco Passaic Limited Partnership	Property Investment	50%	England
The Tesco Navona Limited Partnership	Property Investment	50%	England
Tesco Mobile Limited	Telecommunications	50%	England

* Held by the Parent Company (all other principal subsidiaries are held by an intermediate subsidiary).

The accounting period ends of the joint ventures consolidated in these financial statements range from 31 December 2010 to 28 February 2011. Accounting period end dates differ from those of the Group arise for commercial reasons and depend upon the requirements of the joint venture partner as well as those of the Group.

There are no significant restrictions on the ability of joint ventures to transfer funds to the parent, other than those imposed by the Companies Act 2006.

NOTE 13 GROUP ENTITIES CONTINUED

The share of the assets, liabilities, revenue and profit of the joint ventures, which are included in the Group financial statements, are as follows:

	2011£m	2010£m
Non-current assets	2,720	2,216
Current assets	577	359
Current liabilities	(1,957)	(411)
Non-current liabilities	(1,123)	(2,041)
Goodwill	7	1
Cumulative unrecognised losses	–	12
	224	136
Revenue	369	355
Expenses	(304)	(326)
Profit for the year	65	29

The unrecognised share of losses made by joint ventures during the financial year was £7m (2010 – £3m).

Associates

The Group's principal associates are:

		Share of issued share capital,loan capital and debt	Country of incorporationand principal country
	Business activity	securities	of operation
Greenergy International Limited*	Fuel Supplier	34%	England
Tesco Underwriting Limited*	Insurance	49.9%	England

* Held by an intermediate subsidiary.

On 18 May 2010 the Group acquired an additional 13% of the ordinary share capital of Greenergy International Limited for a cash consideration of £16m, taking the Group's holding to 34%.

The share of the assets, liabilities, revenue and profit of the Group's associates, which are included in the Group financial statements, are as follows:

	2011	2010
	£m	£m
Assets	535	156
Liabilities	(452)	(142)
Goodwill	9	2
	92	16
Revenue	1,551	473
(Loss)/profit for the year	(8)	4

The accounting period ends of the associates consolidated in these financial statements range from 31 December 2010 to 28 February 2011. The accounting period end dates of the associates are different from those of the Group as they depend upon the requirements of the parent companies of those entities.

There are no significant restrictions on the ability of associated undertakings to transfer funds to the parent, other than those imposed by the Companies Act 2006.

NOTE 14 OTHER INVESTMENTS

	2011£m	2010£m
Loan receivable	259	259
Available-for-sale financial assets	849	604
	1,108	863

The loan receivable comprises an interest-free subordinated loan made by Tesco Bank to Royal Bank of Scotland Insurance Group Limited. This loan has no interest receivable and no fixed repayment date.

Available-for-sale financial assets comprise investments in bonds and certificates of deposit with varied maturities of which £202m (2010 – £224m) is current.

Financial statements

Overview

Business review

Governance

Notes to the Group financial statements

NOTE 14 OTHER INVESTMENTS CONTINUED

The following table shows the aggregate movement in the Group's other investments during the year:

	2011	2010
	£m	£m
At beginning of year	863	259
Additions	999	603
Disposals and maturities	(735)	–
Foreign currency translation	(10)	–
IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements	(9)	1
At end of year	1,108	863

NOTE 15 INVENTORIES

	2011£m	2010£m
Goods held for resale	3,142	2,726
Development properties	20	3
	3,162	2,729

NOTE 16 TRADE AND OTHER RECEIVABLES

	2011£m	2010£m
Prepayments and accrued income	387	337
Other receivables	1,400	1,236
Amounts owed by joint ventures and associates (note 30)	527	315
	2,314	1,888

Included within trade and other receivables are the following amounts receivable after more than one year:

	2011£m	2010£m
Prepayments and accrued income	31	31
Other receivables	378	346
Amounts owed by joint ventures and associates	432	309
	841	686

Trade and other receivables are generally non interest-bearing. Credit terms vary by country and the nature of the debt, ranging from seven to 60 days.

Trade receivables are recorded at amortised cost, less provision for impairment.

Provision for impairment of receivables

	£m
At 28 February 2009	(44)
Foreign currency translation	(5)
Charge for the year	(3)
Uncollectible amounts written off	–
Recoveries of amounts previously written off	5
At 27 February 2010	(47)
Foreign currency translation	2
Charge for the year	(5)
Uncollectible amounts written off	6
Recoveries of amounts previously written off	–
At 26 February 2011	(44)

Business review

Governance

NOTE 16 TRADE AND OTHER RECEIVABLES CONTINUED

As at 26 February 2011 trade and other receivables of £37m (2010 – £49m) were past due and impaired. The amount of the provision was £44m (2010 – £47m). The ageing analysis of these receivables is as follows:

	2011	2010
	£m	£m
Up to three months past due	4	8
Three to six months past due	3	4
Over six months past due	30	37
	37	49

As at 26 February 2011 trade and other receivables of £144m (2010 – £115m) were past due but not impaired. The ageing analysis of these receivables is as follows:

	2011	2010
	£m	£m
Up to three months past due	114	97
Three to six months past due	13	10
Over six months past due	17	8
	144	115

No receivables have been renegotiated in the current or prior financial years.

NOTE 17 LOANS AND ADVANCES TO CUSTOMERS

Tesco Bank has loans and advances to customers.

	2011£m	2010£m
Current	2,514	2,268
Non-current	2,127	1,844
	4,641	4,112
The maturity of these loans and advances is as follows:
	2011£m	2010£m
Repayable on demand or at short notice	1	1
Within three months	2,572	2,370
Greater than three months but less than one year	47	70
Greater than one year but less than five years	1,700	1,504
After five years	503	481
	4,823	4,426
Provision for impairment of loans and advances	(182)	(314)
	4,641	4,112

Loans and advances include amounts subject to securitisation of £1,356m (2010 – £1,459m). During 2008 the Group entered into a securitisation transaction and issued debt securities which the Group subsequently purchased. The purpose of the transaction was to allow the Group to enter into the Special Liquidity Scheme whereby it would enter into a sale and repurchase agreement acquiring Treasury Bills issued by the UK Government and using the debt securities as security. As at 26 February 2011 the Group held £296m (2010 – £500m) in respect of this transaction. The Treasury Bills do not meet the recognition criteria of IAS 39 and are not recognised on the Group Balance Sheet.

Provision for impairment of loans and advances

	£m
At 28 February 2009	(250)
Charge for the year	(177)
Uncollectible amounts written off	119
Recoveries of amounts previously written off	(10)
Unwind of discount	4
At 27 February 2010	(314)
Charge for the year	(131)
Uncollectible amounts written off	268
Recoveries of amounts previously written off	(9)
Unwind of discount	4
At 26 February 2011	(182)

Financial statements

Notes to the Group financial statements

NOTE 17 LOANS AND ADVANCES TO CUSTOMERS CONTINUED

At 26 February 2011 Tesco Bank's non-accrual loans were £212m (2010 – £373m). Loan impairment provisions of £182m (2010 – £314m) were held against these loans. During the year ended 26 February 2011 the gross income not recognised but which would have been recognised under the original terms of non-accrual loans was £8m (2010 – £29m).

At 26 February 2011 loans and advances to customers of £73m (2010 – £75m) were past due but not impaired. The ageing analysis of these loans and advances is as follows:

	2011£m	2010£m
Up to one month past due	54	55
Up to two months past due	13	13
Two to three months past due	6	7
	73	75

NOTE 18 LOANS AND ADVANCES TO BANKS AND OTHER FINANCIAL ASSETS

Tesco Bank has loans and advances to banks and other financial assets with the following maturity:

	2011	2010
	£m	£m
Within three months	404	144

There are no loans and advances to banks and other financial assets which are past due and impaired.

NOTE 19 CASH AND CASH EQUIVALENTS

	2011£m	2010£m
Cash at bank and in hand	1,785	2,062
Short-term deposits	85	757
	1,870	2,819

Cash of £1,022m (2010 – £1,314m) held on money market funds is classed as short-term investments.

NOTE 20 TRADE AND OTHER PAYABLES

	2011£m	2010£m
Trade payables	5,782	5,084
Other taxation and social security	514	487
Other payables	2,274	2,014
Amounts payable to joint ventures and associates (note 30)	4	42
Accruals and deferred income	1,910	1,815
	10,484	9,442

Included in other payables are amounts of £181m (2010 – £160m) which are non-current.

NOTE 21 BORROWINGS

Current

	Par value	Maturityyear	2011£m	2010£m
Bank loans and overdrafts	–	–	437	575
Loan from joint ventures (note 30)	–	–	26	23
6.625% MTN	£150m	2010	–	158
4.75% MTN	€750m	2010	–	704
3.875% MTN	€389m	2011	346	–
LIBOR + 1.33% Bond – Tesco Bank	£225m	2012	224	–
Other MTNs	–	–	303	24
Finance leases (note 36)	–	–	50	45
			1,386	1,529

Non-current

		Maturity	2011	2010
	Par value	year	£m	£m
3.875% MTN(a)	€500m	2011	–	479
LIBOR + 1.33% Bond – Tesco Bank	£225m	2012	–	224
5.625% MTN	€1,500m	2012	1,317	1,375
5% MTN	£600m	2014	606	604
5.125% MTN	€600m	2015	510	539
4% RPI MTN(b)	£263m	2016	276	270
5.875% MTN(c)	€1,500m	2016	997	1,520
5.5% USD Bond	$850m	2017	600	621
5.2% Tesco Bank Retail Bond	£125m	2018	126	–
5.5% MTN	£350m	2019	351	351
6.125% MTN	£900m	2022	891	890
5% MTN(d)	£515m	2023	390	520
3.322% LPI MTN(e)	£265m	2025	279	269
6% MTN	£200m	2029	218	212
5.5% MTN	£200m	2033	215	210
1.982% RPI MTN(f)	£221m	2036	231	222
6.15% USD Bond	$1,150m	2037	804	834
5% MTN(g)	£300m	2042	174	306
5.125% MTN	€600m	2047	577	587
5.2% MTN(h)	£500m	2057	274	500
Other MTNs	–	–	169	267
Other loans	–	–	536	780
Finance leases (note 36)	–	–	148	164
			9,689	11,744

(a) During the financial year the Group redeemed €111m of the 3.875% MTN maturing 2011.

(b) The 4% RPI MTN is redeemable at par, indexed for increases in the Retail Price Index (RPI) over the life of the MTN.

(c) During the financial year the Group redeemed €461m of the 5.875% MTN maturing 2016. (d) During the financial year the Group redeemed £126m of the 5% MTN maturing 2023.

(e) The 3.322% Limited Price Inflation (LPI) MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN. The maximum indexation of the principal in any one year is 5%,

with a minimum of 0%. (f) The 1.982% RPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN.

(g) During the financial year the Group redeemed £127m of the 5% GBP MTN maturing 2042.

(h) During the financial year the Group redeemed £221m of the 5.2% GBP MTN maturing 2057.

Borrowing facilities

The Group has the following undrawn committed facilities available at 26 February 2011, in respect of which all conditions precedent had been met as at that date:

	2011£m	2010£m
Expiring between one and two years	–	1,000
Expiring in more than two years	2,825	1,600
	2,825	2,600

F-75

All facilities incur commitment fees at market rates and would provide funding at floating rates.

Financial statements

Overview

Governance

Notes to the Group financial statements

NOTE 22 FINANCIAL INSTRUMENTS

Derivatives are used to hedge exposure to market risks and those that are held as hedging instruments are formally designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting purposes and the Group's hedging policies are further described below.

Finance income of £27m (2010 – £20m) resulted from hedge ineffectiveness.

Fair value hedges

The Group maintains interest rate and cross currency swap contracts as fair value hedges of the interest rate and currency risk on fixed rate debt issued by the Group. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Group Income Statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss on the hedging instrument and hedged item is recognised in the Group Income Statement within finance income or costs. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying value of the hedged item is amortised to the Group Income Statement under the effective interest rate method.

A loss of £369m on hedging instruments was recognised during the year, offset by a gain of £396m on hedged items (2010 – a loss of £65m on hedging instruments was offset by a gain of £85m on hedged items).

Cash flow hedges

The Group uses forward foreign currency contracts to hedge the cost of future purchases of goods for resale, where those purchases are denominated in a currency other than the functional currency of the purchasing company. Where these contracts qualify for hedge accounting, mark-to-market gains and losses are deferred in equity. These hedging instruments are primarily used to hedge purchases in Euros and US Dollars. The cash flows hedged will occur and will affect the Group Income Statement within one year of the balance sheet date.

The Group also uses index-linked swaps to hedge cash flows on index-linked debt, interest rate swaps to hedge interest cash flows on debt and cross currency swaps to hedge intercompany loan cash flows denominated in South Korean Won (KRW).

Net investment hedges

The Group uses forward foreign currency contracts, currency denominated borrowings and currency swaps to hedge the exposure of a proportion of its non-Sterling denominated assets against changes in value due to changes in foreign exchange rates.

The Group has a KRW denominated liability relating to the future purchase of the minority shareholding of its subsidiary, Homeplus Co. Limited (formerly Samsung Tesco Co. Limited). This liability has been designated as a net investment hedge of a proportion of the assets of Homeplus Co. Limited.

Gains and losses accumulated in equity are included in the Group Income Statement on disposal of the overseas operation.

Financial instruments not qualifying for hedge accounting

The Group's policy is not to use derivatives for trading purposes, however, some derivatives do not qualify for hedge accounting, or are specifically not designated as a hedge where gains and losses on the hedging instrument and the hedged item naturally offset in the Group Income Statement.

These instruments include caps, interest rate swaps and forward foreign currency contracts. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the Group Income Statement within finance income or costs.

The Group had a liability relating to the future purchases of the minority shareholding of its subsidiary, dunnhumby Limited, which has been purchased during the financial year. Changes in the value of that liability were recognised immediately in the Group Income Statement within finance income or costs.

The fair value of derivative financial instruments have been disclosed in the Group Balance Sheet as follows:

		2011		2010
	Asset£m	Liability£m	Asset£m	Liability£m
Current	148	(255)	224	(146)
Non-current	1,139	(600)	1,250	(776)
	1,287	(855)	1,474	(922)

NOTE 22 FINANCIAL INSTRUMENTS CONTINUED

The fair value and notional amounts of derivatives analysed by hedge type are as follows:

				2011				2010
		Asset		Liability		Asset		Liability
	Fair value£m	Notional£m	Fair value£m	Notional£m	Fair value£m	Notional£m	Fair value£m	Notional£m
Fair value hedges
Interest rate swaps and similar instruments	27	1,410	(57)	1,844	10	685	(88)	2,304
Cross currency swaps	717	2,674	(28)	714	1,130	4,513	(45)	259
Cash flow hedges
Interest rate swaps and similar instruments	–	–	(54)	455	–	–	(40)	555
Cross currency swaps	126	298	(151)	784	129	315	(205)	1,064
Index-linked swaps	–	–	(8)	772	–	–	–	–
Forward foreign currency contracts	8	346	(12)	1,269	19	483	(15)	600
Net investment hedges
Cross currency swaps	–	–	–	–	–	–	(30)	124
Forward foreign currency contracts	19	383	(97)	952	19	244	(172)	1,037
Future purchases of non-controlling interests	–	–	(106)	–	–	–	(105)	–
Derivatives not in a formal hedge relationship
Interest rate swaps and similar instruments	1	25	(1)	25	1	145	(5)	355
Cross currency swaps	2	84	(10)	65	2	204	(25)	533
Index-linked swaps	376	2,639	(311)	2,639	139	995	(109)	995
Forward foreign currency contracts	11	523	(20)	720	25	635	(42)	1,254
Future purchases of non-controlling interests	–	–	–	–	–	–	(41)	–
Total	1,287	8,382	(855)	10,239	1,474	8,219	(922)	9,080

The carrying value and fair value of financial assets and liabilities are as follows:

		2011		2010
	Carryingvalue£m	Fairvalue£m	Carryingvalue£m	Fairvalue£m
Assets
Cash and cash equivalents	1,870	1,870	2,819	2,819
Loans and advances to customers – Tesco Bank	4,641	4,636	4,112	4,325
Loans and advances to banks and other financial assets – Tesco Bank	404	404	144	144
Short-term investments	1,022	1,022	1,314	1,314
Other investments – Tesco Bank	1,108	1,093	863	848
Joint venture and associates loan receivables (note 30)	503	514	309	309
Other receivables	25	25	–	–
Derivative financial assets:
Interest rate swaps and similar instruments	28	28	11	11
Cross currency swaps	845	845	1,261	1,261
Index-linked swaps	376	376	139	139
Forward foreign currency contracts	38	38	63	63
Total financial assets	10,860	10,851	11,035	11,233

Liabilities

(708)	(707)	(771)	(770)
(628)	(614)	(713)	(683)

(4,584)	(4,678)	(5,513)	(5,617)
(4,957)	(4,915)	(6,067)	(5,992)
(198)	(198)	(209)	(209)
(5,074)	(5,081)	(4,357)	(4,357)
(36)	(36)	(30)	(30)

(112)	(112)	59	59
(189)	(189)	(305)	(305)
(319)	(319)	(301)	(301)
(129)	(129)	(229)	(229)
(106)	(106)	(146)	(146)
(17,040)	(17,084)	(18,582)	(18,580)
(6,180)	(6,233)	(7,547)	(7,347)

F-77

Financial statements

Governance

Business review

Overview

Notes to the Group financial statements

NOTE 22 FINANCIAL INSTRUMENTS CONTINUED

The fair values of financial instruments have been determined by reference to prices available from the markets on which the instruments are traded, where they are available. Where market prices are not available, the fair value has been calculated by discounting expected future cash flows at prevailing interest rates. The fair value of cash and cash equivalents and short-term investments is the same as their carrying value.

Financial assets and liabilities by category

The accounting classifications of each class of financial assets and liabilities as at 26 February 2011 and 27 February 2010 are as follows:

At 26 February 2011	Availablefor-sale£m	Loans andreceivables/other financialliabilities£m	Fair valuethroughprofit or loss£m	Total£m
Cash and cash equivalents	–	1,870	–	1,870
Loans and advances to customers – Tesco Bank	–	4,641	–	4,641
Loans and advances to banks and other financial assets – Tesco Bank	–	404	–	404
Short-term investments	–	1,022	–	1,022
Other investments – Tesco Bank	849	259	–	1,108
Joint venture and associates loan receivables (note 30)	–	503	–	503
Other receivables	–	25	–	25
Customer deposits – Tesco Bank	–	(5,074)	–	(5,074)
Deposits by banks – Tesco Bank	–	(36)	–	(36)
Short-term borrowings	–	(1,336)	–	(1,336)
Long-term borrowings	–	(9,541)	–	(9,541)
Finance leases (note 36)	–	(198)	–	(198)
Derivative financial instruments:
Interest rate swaps and similar instruments	–	–	(84)	(84)
Cross currency swaps	–	–	656	656
Index-linked swaps	–	–	57	57
Forward foreign currency contracts	–	–	(91)	(91)
Future purchases of non-controlling interests	–	–	(106)	(106)
	849	(7,461)	432	(6,180)

	Available	Loans andreceivables/other financial	Fair valuethrough
At 27 February 2010	for-sale£m	liabilities£m	profit or loss£m	Total£m
Cash and cash equivalents	–	2,819	–	2,819
Loans and advances to customers – Tesco Bank	–	4,112	–	4,112
Loans and advances to banks and other financial assets – Tesco Bank	–	144	–	144
Short-term investments	–	1,314	–	1,314
Other investments – Tesco Bank	604	259	–	863
Joint venture loan receivables (note 30)	–	309	–	309
Customer deposits – Tesco Bank	–	(4,357)	–	(4,357)
Deposits by banks – Tesco Bank	–	(30)	–	(30)
Short-term borrowings	–	(1,484)	–	(1,484)
Long-term borrowings	–	(11,580)	–	(11,580)
Finance leases (note 36)	–	(209)	–	(209)
Derivative financial instruments:
Interest rate swaps and similar instruments	–	–	(123)	(123)
Cross currency swaps	–	–	956	956
Index-linked swaps	–	–	31	31
Forward foreign currency contracts	–	–	(166)	(166)
Future purchases of non-controlling interests	–	–	(146)	(146)
	604	(8,703)	552	(7,547)

NOTE 22 FINANCIAL INSTRUMENTS CONTINUED

The following table presents the Group's financial assets and liabilities that are measured at fair value at 26 February 2011, by level of fair value hierarchy:

• quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);

inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and
inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

	Level 1£m	Level 2£m	Level 3£m	Total£m
Assets
Available-for-sale financial assets	188	661	–	849
Derivative financial instruments:
Interest rate swaps and similar instruments	–	28	–	28
Cross currency swaps	–	845	–	845
Index-linked swaps	–	376	–	376
Forward foreign currency contracts	–	38	–	38
Total assets	188	1,948	–	2,136
Liabilities
Derivative financial instruments:
Interest rate swaps and similar instruments	–	(112)	–	(112)
Cross currency swaps	–	(189)	–	(189)
Index-linked swaps	–	(319)	–	(319)
Forward foreign currency contracts	–	(129)	–	(129)
Future purchases of non-controlling interests	–	–	(106)	(106)
Total liabilities	–	(749)	(106)	(855)
Total	188	1,200	(106)	1,282

The following table presents the changes in Level 3 instruments:

	2011£m	2010£m
At beginning of year	(146)	(200)
Losses recognised in finance costs in the Group Income Statement	(6)	(26)
Gains/(losses) recognised in the Group Statement of Changes in Equity	2	(11)
Cash flow	44	91
At end of year	(106)	(146)

During the financial year there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into or out of Level 3 fair value measurements. A reasonably possible change in assumptions is unlikely to result in a significant change in the fair value of Level 3 instruments.

NOTE 23 FINANCIAL RISK FACTORS

The main financial risks faced by the Group relate to fluctuations in interest and foreign exchange rates, the risk of default by counterparties to financial transactions and the availability of funds to meet business needs. The management of these risks is set out below. The Group Balance Sheet position at 26 February 2011 is representative of the position throughout the financial year.

Risk management is carried out by a central treasury department under policies approved by the Board of Directors. The Board provides written principles for risk management, as described in the Business Review on pages 51 to 57.

Interest rate risk

Interest rate risk arises from long-term borrowings. Debt issued at variable rates exposes the Group to cash flow interest rate risk. Debt issued at fixed rates exposes the Group to fair value risk. Our interest rate management policy is explained on page 56.

The Group has Retail Price Index (RPI) debt where the principal is indexed to increases in the RPI index. RPI debt is treated as floating rate debt. The Group also has Limited Price lnflation (LPI) debt, where the principal is indexed to RPI, with an annual maximum increase of 5% and a minimum of 0%. LPI debt is treated as fixed rate debt.

For interest rate risk relating to Tesco Bank, refer to the separate section on Tesco Bank financial risk factors below.

Overview

Business review

Governance

Notes to the Group financial statements

NOTE 23 FINANCIAL RISK FACTORS CONTINUED

During 2011 and 2010, net debt was managed using derivative instruments to hedge interest rate risk as follows:

	2011					2010
	Fixed	Floating	Total	Fixed	Floating	Total
	£m	£m	£m	£m	£m	£m
Cash and cash equivalents	–	1,870	1,870	–	2,819	2,819
Loans and advances to customers – Tesco Bank	2,161	2,480	4,641	1,827	2,285	4,112
Loans and advances to banks and other financial assets – Tesco Bank	404	–	404	144	–	144
Short-term investments	–	1,022	1,022	–	1,314	1,314
Other investments – Tesco Bank	925	183	1,108	581	282	863
Joint venture and associate, loan receivables (note 30)	–	503	503	–	309	309
Other receivables	–	25	25	–	–	–
Finance leases (note 36)	(92)	(106)	(198)	(83)	(126)	(209)
Bank and other borrowings	(9,697)	(1,180)	(10,877)	(11,806)	(1,258)	(13,064)
Customer deposits – Tesco Bank	(398)	(4,676)	(5,074)	–	(4,357)	(4,357)
Deposits by banks – Tesco Bank	(36)	–	(36)	(30)	–	(30)
Future purchases of non-controlling interests	(106)	–	(106)	(146)	–	(146)
Derivative effect:
Interest rate swaps	(1,218)	1,218	–	(2,215)	2,215	–
Cross currency swaps	3,459	(3,459)	–	6,677	(6,677)	–
Index-linked swaps	(498)	498	–	–	–	–
Caps and collars	–	–	–	120	(120)	–
Total	(5,096)	(1,622)	(6,718)	(4,931)	(3,314)	(8,245)

Credit risk

Credit risk arises from cash and cash equivalents, trade and other receivables, customer deposits, financial instruments and deposits with banks and financial institutions. The Group policy on credit risk is described on page 57.

The counterparty exposure under derivative contracts is £1,287m (2010 – £1,474m). The Group policy is to transact derivatives only with counterparties rated at least A1 by Moody's.

The Group considers its maximum credit risk to be £10.9bn (2010 – £11.0bn), being the Group's total financial assets.

For credit risk relating to Tesco Bank, refer to the separate section on Tesco Bank financial risk factors below.

Liquidity risk

Liquidity risk is managed by short-term and long-term cash flow forecasts. In addition, the Group has committed facility agreements for £2.8bn (2010 – £2.6bn), which mature between 2014 and 2015.

The Group has a European Medium Term Note programme of £15.0bn, of which £8.5bn was in issue at 26 February 2011 (2010 – £10.6bn), plus a Euro Commercial Paper programme of £2.0bn, none of which was in issue at 26 February 2011 (2010 – £nil), and a US Commercial Paper programme of $4.0bn, none of which was in issue at 26 February 2011 (2010 – $nil).

For liquidity risk relating to Tesco Bank, refer to the separate section on Tesco Bank financial risk factors below.

NOTE 23 FINANCIAL RISK FACTORS CONTINUED

The following is an analysis of the undiscounted contractual cash flows payable under financial liabilities and derivatives. The potential cash outflow of £17.1bn is considered acceptable as it is offset by financial assets and trade receivables of £13.2bn (2010 – £15.6bn offset by financial assets and trade receivables of £12.9bn).

The undiscounted cash flows will differ from both the carrying values and fair value. Floating rate interest is estimated using the prevailing rate at the balance sheet date. Cash flows in foreign currencies are translated using spot rates at the balance sheet date. For index-linked liabilities, inflation is estimated at 4% for the life of the liability.

At 26 February 2011	Duewithin1 year£m	Duebetween1 and 2years£m	Duebetween2 and 3years£m	Duebetween3 and 4years£m	Duebetween4 and 5years£m	Duebeyond5 years£m
Non-derivative financial liabilities
Bank and other borrowings	(1,278)	(1,587)	(876)	(622)	–	(6,647)
Interest payments on borrowings	(518)	(495)	(395)	(355)	(326)	(3,828)
Customer deposits – Tesco Bank	(4,898)	(173)	(3)	–	–	–
Deposits by banks – Tesco Bank	(36)	–	–	–	–	–
Finance leases	(56)	(36)	(15)	(15)	(16)	(205)
Trade and other payables	(10,303)	(84)	(14)	(7)	(3)	(73)
Derivative and other financial liabilities
Net settled derivative contracts – receipts	74	68	68	37	14	31
Net settled derivative contracts – payments	(176)	(109)	(88)	(76)	(57)	(697)
Gross settled derivative contracts – receipts	1,619	641	468	672	132	3,368
Gross settled derivative contracts – payments	(1,404)	(652)	(341)	(610)	(60)	(2,631)
Future purchases of non-controlling interests	(85)	(24)	–	–	–	–
Total	(17,061)	(2,451)	(1,196)	(976)	(316)	(10,682)
At 27 February 2010	Duewithin1 year£m	Duebetween1 and 2years£m	Duebetween2 and 3years£m	Duebetween3 and 4years£m	Duebetween4 and 5years£m	Duebeyond5 years£m
Non-derivative financial liabilities
Bank and other borrowings	(1,484)	(1,078)	(1,615)	(845)	(637)	(7,267)
Interest payments on borrowings	(554)	(518)	(491)	(405)	(370)	(4,605)
Customer deposits – Tesco Bank	(4,357)	–	–	–	–	–
Deposits by banks – Tesco Bank	(30)	–	–	–	–	–
Finance leases	(49)	(47)	(33)	(11)	(10)	(178)
Trade and other payables	(9,282)	(56)	(26)	(4)	(7)	(67)
Derivative and other financial liabilities
Net settled derivative contracts – receipts	71	50	50	48	21	19
Net settled derivative contracts – payments	(164)	(119)	(59)	(35)	(56)	(695)
Gross settled derivative contracts – receipts	1,966	1,747	757	867	759	5,273
Gross settled derivative contracts – payments	(1,703)	(1,362)	(689)	(866)	(653)	(3,792)
Future purchases of non-controlling interests	–	(131)	(25)	–	–	–
Total	(15,586)	(1,514)	(2,131)	(1,251)	(953)	(11,312)

Foreign exchange risk

The Group is exposed to foreign exchange risk principally via:

• Transactional exposure, from the cost of future purchases of goods for resale, where those purchases are denominated in a currency other than the functional currency of the purchasing company. Transactional exposures that could significantly impact the Group Income Statement are hedged. These exposures are hedged via forward foreign currency contracts which are designated as cash flow hedges. The notional and fair value of these contracts is shown in note 22.

• Loans to non-UK subsidiaries. These are hedged via foreign currency transactions and borrowings in matching currencies, which are not formally designated as hedges, as gains and losses on hedges and hedged loans will naturally offset.

Governance

Overview

Business review

• Net investment exposure, from the value of net investments outside the UK. The Group hedges a proportion of its investments in its international subsidiaries via foreign currency transactions and borrowings in matching currencies, which are formally designated as net investment hedges.

Notes to the Group financial statements

NOTE 23 FINANCIAL RISK FACTORS CONTINUED

The impact on Group financial statements from foreign currency volatility is shown in the sensitivity analysis below.

Sensitivity analysis

The analysis excludes the impact of movements in market variables on the carrying value of pension and other post-employment obligations and on the retranslation of overseas net assets as required by IAS 21 'The Effects of Changes in Foreign Exchange Rates'. However, it does include the foreign exchange sensitivity resulting from all local entity non-functional currency financial instruments.

The sensitivity analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives portfolio, and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 26 February 2011. It should be noted that the sensitivity analysis reflects the impact on income and equity due to all financial instruments held at the balance sheet date. It does not reflect any change in sales or costs that may result from changing interest or exchange rates.

The following assumptions were made in calculating the sensitivity analysis:

the sensitivity of interest payable to movements in interest rates is calculated on net floating rate debt, deposits and derivative instruments with no sensitivity assumed for RPI-linked debt;
changes in the carrying value of derivative financial instruments designated as fair value hedges from movements in interest rates or foreign exchange rates have an immaterial effect on the Group Income Statement and equity due to compensating adjustments in the carrying value of debt;
changes in the carrying value of derivative financial instruments designated as net investment hedges from movements in foreign exchange rates are recorded directly in the Group Statement of Comprehensive Income;
changes in the carrying value of derivative financial instruments not designated as hedging instruments only affect the Group Income Statement;
all other changes in the carrying value of derivative financial instruments designated as hedging instruments are fully effective with no impact on the Group Income Statement; and
the floating leg of any swap or any floating rate debt is treated as not having any interest rate already set, therefore a change in interest rates affects a full 12-month period for the interest payable portion of the sensitivity calculations.

Using the above assumptions, the following table shows the illustrative effect on the Group Income Statement and the Group Statement of Comprehensive Income that would result from changes in UK interest rates and in exchange rates:

		2011		2010
	Incomegain/(loss)£m	Equitygain/(loss)£m	Incomegain/(loss)£m	Equitygain/(loss)£m
1% increase in GBP interest rates (2010 – 1%)	(14)	–	(38)	–
5% appreciation of the Euro (2010 – 15%)	2	(46)	(13)	(43)
5% appreciation of the South Korean Won (2010 – 10%)	(1)	1	–	(82)
5% appreciation of the US Dollar (2010 – 25%)	8	35	(1)	(8)
10% appreciation of the Thai Baht (2010 – 25%)	–	–	–	(1)
5% appreciation of the Czech Koruna (2010 – 10%)	–	(6)	–	(31)

A decrease in interest rates and a depreciation of foreign currencies would have the opposite effect to the impact in the table above.

The impact on the Group Statement of Comprehensive Income from changing exchange rates results principally from foreign currency deals used as net investment hedges. The impact on the Group Statement of Comprehensive Income will largely be offset by the revaluation in equity of the hedged assets. For changes in the USD/GBP exchange rate, the impact on the Group Statement of Comprehensive Income results principally from forward purchases of US Dollars as cash flow hedges.

Capital risk

The Group's objectives when managing capital (defined as net debt plus equity) are to safeguard the Group's ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders, while maintaining a strong credit rating and headroom whilst optimising return to shareholders through an appropriate balance of debt and equity funding. The Group manages its capital structure and makes adjustments to it, in light of changes to economic conditions and the strategic objectives of the Group.

To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, buy back shares and cancel them, or issue new shares. In April 2006 the Group outlined its plan to release cash from its property assets, via a sequence of property joint ventures and other transactions, and return significant value to shareholders, either through enhanced dividends or share buy-backs. The target for the value of share buy-backs was increased from £1.5bn to £3.0bn over a five-year period from April 2007. Whilst the Group continued with the policy at the beginning of 2009, it subsequently used the proceeds from property divestment to pay down debt, following the two major acquisitions in 2009 (Homever and Tesco Bank). During 2009 the Group purchased and cancelled £100m ordinary shares. In the financial years 2010 and 2011 the Group continued to use the proceeds from the sale of property to pay down debt.

The policy for debt is to ensure a smooth debt maturity profile with the objective of ensuring continuity of funding. This policy continued during the current financial year with bonds redeemed of £1,861m (2010 – £390m) and new bonds issued totalling £125m (2010 – £nil). The Group borrows centrally and locally, using a variety of capital market issues and borrowing facilities to meet the requirements of each local business.

NOTE 23 FINANCIAL RISK FACTORS CONTINUED

Tesco Bank

Interest rate risk

Interest rate risk arises where assets and liabilities in Tesco Bank's banking activities have different repricing dates. Tesco Bank policy seeks to minimise the sensitivity of net interest income to changes in interest rates. Potential exposures to interest rate movements in the medium to long term are measured and controlled through position and sensitivity limits. Short-term exposures are measured and controlled in terms of net interest income sensitivity over 12 months to a 1% parallel movement in interest rates. Tesco Bank also use value at risk (VaR) for risk management purposes with a time horizon of one trading day and a confidence interval of 95%. Interest rate risk is managed using interest rate swaps as the main hedging instrument.

Liquidity risk

Liquidity risk is the risk that Tesco Bank is unable to meet its payment obligations as they fall due. Liquidity risk is managed within Tesco Bank's banking activities and adheres to the liquidity requirements set by the Financial Services Authority (FSA). Tesco Bank's Board has set a defined liquidity risk policy and contingency funding which is prudent and in excess of the minimum requirements as set out by the FSA. A diversified portfolio of high-quality liquid and marketable assets is maintained. Cash flow commitments and marketable asset holdings are measured and managed on a daily basis. Tesco Bank has sufficient liquidity to meet all foreseeable outflow requirements as they fall due and its liquidity risk is further mitigated by its well diversified retail deposit base and a pool of surplus cash resources that are invested in a range of marketable assets.

Credit risk

Credit risk is the probability of customers and counterparties failing to meet their obligations to Tesco Bank and arises principally from Tesco Bank's lending activities, but also from other transactions involving on and off-balance sheet instruments.

Internal reporting and oversight of risk assets is principally differentiated by credit ratings. Internal ratings are used to assess the credit quality of borrowers. Customers are assigned credit ratings, based on various credit grading models that reflect the probability of default.

Limits have been established for all counterparties based on their respective credit ratings. The limits and proposed counterparties are reviewed and approved by the Risk Management Committee (RMC) of Tesco Bank.

Expressed as an annual probability of default, the upper and lower boundaries and the midpoint for each of the asset quality grades are as follows:

At 26 February 2011 and 27 February 2010

									Annual probability of default
Asset quality grade						Minimum%	Midpoint%	Maximum%	S&Pequivalent
AQ1						0.00	0.10	0.20	AAA to BBB
AQ2						0.21	0.40	0.60	BB+ to BB
AQ3						0.61	1.05	1.50	BB- to B+
AQ4						1.51	3.25	5.00	B+ to B
AQ5						5.01	52.50	100.00	B and below
						Accruing	Non	Impairment
At 26 February 2011	AQ1£m	AQ2£m	AQ3£m	AQ4£m	AQ5£m	past due£m	accrual£m	provision£m	Total£m
Assets:
Other investments	1,108	–	–	–	–	–	–	–	1,108
Loans and advancesto customers	599	466	924	1,663	886	73	212	(182)	4,641
Loans and advancesto banks and other
financial assets	404	–	–	–	–	–	–	–	404
Total assets	2,111	466	924	1,663	886	73	212	(182)	6,153
Commitments (note 34)	4,254	1,601	645	444	183	–	–	–	7,127
Total off-balance sheet	4,254	1,601	645	444	183	–	–	–	7,127
At 27 February 2010	AQ1£m	AQ2£m	AQ3£m	AQ4£m	AQ5£m	Accruingpast due£m	Nonaccrual£m	Impairmentprovision£m	Total£m
Assets:
Other investments	863	–	–	–	–	–	–	–	863
Loans and advancesto customers	501	381	762	1,495	838	76	373	(314)	4,112
Loans and advancesto banks and otherfinancial assets	144	–	–	–	–	–	–	–	144
Total assets	1,508	381	762	1,495	838	76	373	(314)	5,119

Commitments (note 34)	3,926	1,329	573	452	184	–	–	–	6,464
Total off-balance sheet	3,926	1,329	573	452	184	–	–	–	6,464

Governance

Overview

Business review

Financial statements

Notes to the Group financial statements

NOTE 23 FINANCIAL RISK FACTORS CONTINUED

Insurance risk

Tesco Bank is exposed to insurance risks directly through its historic distribution arrangement with RBS Insurance and indirectly through its ownership of 49.9% of Tesco Underwriting Limited (TU), an authorised insurance company.

Since October 2010 the majority of new business policies for Home and Motor Insurance product sold by Tesco Bank have been underwritten by TU. Customers renewing their Tesco Motor or Home Insurance policy insurance have been underwritten by TU since November 2010. The key insurance risks within TU relate to Underwriting Risk and specifically the potential for a major weather event to generate significant claims on Home insurance or on Motor insurance the cost of settling bodily injury claims. Exposure to this risk is actively managed within TU with close monitoring of performance metrics and the use of reinsurance to limit TU's exposure above predetermined limits.

The legacy arrangement with RBS Insurance is now in run off and the primary risk that Tesco Bank remains exposed to is Reserving Risk – the risk that reserves set by RBS Insurance will be insufficient to cover the ultimate cost of insurance claims arising from this activity. This is particularly relevant to Motor Insurance claims where the ultimate cost of large bodily injury claims is uncertain and the time taken to settle such claims can vary significantly depending on the severity of the injury. This risk is, in part, mitigated by the use of reinsurance to limit Tesco Bank's exposure to the cost of individual claims above certain predetermined limits. However, the nature of this is exposure results in the process of estimating the ultimate cost of these claims carrying a degree of uncertainty.

Since October 2010 Pet, Travel and Breakdown insurance have all been distributed by Tesco Bank on a 'white label' basis. Tesco Bank does not carry the insurance risk associated with these products.

NOTE 24 CUSTOMER DEPOSITS

	2011£m	2010£m
Customer deposits	5,074	4,357

Customer deposits are recorded at amortised cost. Included within customer deposits is £177m (2010 – £nil) that is non-current.

NOTE 25 DEPOSITS BY BANKS

The Group has deposits by banks with the following maturity:
	2011£m	2010£m
Within three months	26	30
Three to six months	10	–
	36	30

Deposits by banks are recorded at amortised cost.

NOTE 26 PROVISIONS

	Propertyprovisions£m	Otherprovision£m	Total£m
At 28 February 2009	111	99	210
Foreign currency translation	12	–	12
Amount provided in the year	–	1	1
Amount utilised in the year	(12)	–	(12)
At 27 February 2010	111	100	211
Foreign currency translation	(3)	–	(3)
Amount released in the year	(18)	(50)	(68)
Amount provided in the year	48	–	48
Amount utilised in the year	–	(11)	(11)
At 26 February 2011	138	39	177

Property provisions comprise obligation for future rents payable net of rents receivable on onerous and vacant property leases, terminal dilapidations and future rents above market value on unprofitable stores. The majority of these provisions are expected to be utilised over the period to 2020.

The other provision balance relates to a provision for customer redress in respect of potential customer complaints arising from historic sales of Personal Protection Insurance (PPI). The provision is likely to be utilised over several years, although the timing of utilisation is uncertain.

The provision as at 27 February 2010 was established based on a forecast of the level of complaints expected to be received. The number of complaints actually settled during the year has been lower than was expected, resulting in a reduction to the provision held at 26 February 2011 of £50m. We will continue to handle claims and redress customers in accordance with PS 10/12 (see note 1). This will include ongoing analysis of historical claims experience in accordance with the guidance.

On 9 October 2010, the British Bankers Association (BBA) applied to the courts for a judicial review in which they sought to overturn Policy Statement 10/12 issued by the FSA during the year in respect of PPI. On the 20 April 2011, the BBA lost their challenge on all grounds. The BBA have not yet publicly announced whether they intend to appeal the decision. The provision at 26 February 2011 did not assume a favourable outcome for the BBA.

NOTE 26 PROVISIONS CONTINUED

The balances are analysed as follows:

	2011£m	2010£m
Current	64	39
Non-current	113	172
	177	211

NOTE 27 SHARE-BASED PAYMENTS

The Group Income Statement charge for the year recognised in respect of share-based payments is £289m (2010 – £300m), which is made up of share option schemes and share bonus payments. Of this amount, £220m (2010 – £241m) will be settled in equity and £69m (2010 – £59m) in cash.

Share option schemes

The Company had nine share option schemes in operation during the financial year, all of which are equity-settled schemes:

i) The Savings-related Share Option Scheme (1981) permits the grant to employees of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from employees of an amount between £5 and £250 per four-weekly period. Options are capable of being exercised at the end of the three- or five-year period at a subscription price not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date.
ii) The Irish Savings-related Share Option Scheme (2000) permits the grant to Irish employees of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from employees of an amount between €12 and €320 per four-weekly period. Options are capable of being exercised at the end of the three- or five-year period at a subscription price not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date.
iii) The Approved Executive Share Option Scheme (1994) was adopted on 17 October 1994. The exercise of options granted under this scheme will normally be conditional upon the achievement of a specified performance target related to the growth in earnings per share over a three-year period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme.
iv) The Unapproved Executive Share Option Scheme (1996) was adopted on 7 June 1996. The exercise of options granted under this scheme will normally be conditional upon the achievement of a specified performance target related to the growth in earnings per share over a three-year period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme.
v) The International Executive Share Option Scheme (1994) was adopted on 20 May 1994. This scheme permits the grant to selected non-UK executives of options to acquire ordinary shares on substantially the same basis as their UK counterparts. The exercise of options granted under this scheme will normally be conditional upon the achievement of a specified performance target related to the growth in earnings per share over a three-year period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme.
vi) The Executive Incentive Plan (2004) was adopted on 5 July 2004. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options are normally exercisable between three and ten years from the date of grant for nil consideration.
vii) The Performance Share Plan (2004) was adopted on 5 July 2004 and amended on 29 June 2007. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options granted before 29 June 2007 are normally exercisable between four and ten years from the date of grant for nil consideration. Options granted after 29 June 2007 are normally exercisable between three and ten years from the date of grant for nil consideration. The exercise of options will normally be conditional upon the achievement of specified performance targets related to the return on capital employed over a three-year period.
viii) The Discretionary Share Option Plan (2004) was adopted on 5 July 2004. This scheme permits the grant of approved, unapproved and international options in respect of ordinary shares to selected executives. Options are normally exercisable between three and ten years from the date of grant at a price not less than the middle-market quotation or average middle-market quotations of an ordinary share for the dealing day or three dealing days preceding the date of grant. The exercise of options will normally be conditional upon the achievement of a specified performance target related to the annual percentage growth in earnings per share over a three-year period. There will be no discounted options granted under this scheme.
ix) The Group New Business Incentive Plan (2007) was adopted on 29 June 2007. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options will normally vest in four tranches: four, five, six and seven years after the date of grant and will be exercisable for up to two years from the vesting dates for nil consideration. The exercise of options will normally be conditional upon the achievement of specified performance targets related to the return on capital employed over the seven-year plan.

Overview

Business review

Governance

Notes to the Group financial statements

NOTE 27 SHARE-BASED PAYMENTS CONTINUED

The following tables reconcile the number of share options outstanding and the weighted average exercise price (WAEP):

For the year ended 26 February 2011

		Savings-relatedshare option scheme	share option scheme	Irish savings-related		Approvedshare option scheme		Unapprovedshare option scheme	International executive	share option scheme	share options	Nil cost
	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options WAEP
Outstanding at27 February
2010	138,234,520	323.37	5,455,068	326.70	14,550,891	361.57	85,907,622		351.46 54,880,748	363.64	9,185,455	0.00
Granted	29,920,166	386.00	1,470,162	386.00	3,793,684	419.85	21,447,502	419.81	17,065,475	420.00	4,148,918	0.00
Forfeited	(7,971,500)	328.09	(666,990)	320.21	(1,030,137)	395.79	(3,915,038)	401.52	(3,192,794)	382.05	(499,596) 0.00
Exercised	(18,957,476)	256.02	(537,638)	261.38	(2,466,841)	270.56	(10,927,268)	274.37	(3,687,375)	283.46	(435,650) 0.00
Outstanding at26 February2011	141,225,710	345.41	5,720,602	348.84	14,847,597	389.21	92,512,818		374.29 65,066,054		382.06 12,399,127	0.00
Exercisable as at26 February2011	15,506,889	366.48	668,423	381.98	6,090,853	375.33	32,577,023	348.13	19,138,101	364.16	3,744,903	0.00
Exercise pricerange (pence)		248.00 to410.00		248.00 to410.00		197.50 to473.75		197.50 to473.75		197.50 to473.75		0.00
Weighted averageremainingcontractual
life (years)		0.43		0.43		4.92		4.61		4.98		6.74

For the year ended 27 February 2010

	share option scheme	Savings-related		Irish savings-relatedshare option scheme		Approvedshare option scheme		Unapprovedshare option scheme	International executive	share option scheme		Nil costshare options
	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP
Outstanding at28 February
2009	142,810,097	306.21	5,418,903		315.67 15,868,920		350.56 81,299,884		339.97 43,898,205		366.61 14,323,708	0.00
Granted	38,117,516	328.00	1,752,363	328.00	2,844,857		338.40 26,542,534		338.42 19,097,981	338.82	3,093,147	0.00
Forfeited	(9,476,452)	315.43	(873,617)	314.96			(581,769) 409.75 (3,213,394)	409.29			(2,147,644) 403.74 (2,299,256)	0.00
Exercised	(33,216,641) 257.20		(842,581) 270.60				(3,581,117) 286.54 (18,721,402) 273.16 (5,967,794) 291.66				(5,932,144)	0.00
Outstanding at27 February2010	138,234,520 323.37		5,455,068		326.70 14,550,891		361.57 85,907,622		351.46 54,880,748	363.64	9,185,455	0.00
Exercisable as at27 February2010	6,287,764	266.10	369,370	282.75	5,868,560		282.29 32,430,807		280.29 15,277,598	289.05	–	–
Exercise pricerange (pence)		195.00 to307.00		195.00 to307.00		197.50 to388.75		197.50 to415.50		197.50 to318.60		–
Weighted averageremainingcontractuallife (years)		0.18		0.15		4.26		4.53		4.75		–

Share options were exercised on a regular basis throughout the financial year. The average share price during the year ended 26 February 2011 was 417.80p (2010 – 380.05p).

The fair value of share options is estimated at the date of grant using the Black-Scholes option pricing model. The following table gives the assumptions applied to the options granted in the respective periods shown. No assumption has been made to incorporate the effects of expected early exercise.

NOTE 27 SHARE-BASED PAYMENTS CONTINUED

			2011			2010
	Savings-relatedshare optionschemes	Executiveshare optionschemes	Nil costoptionschemes	Savings-relatedshare optionschemes	Executiveshare optionschemes	Nil costoptionschemes
Expected dividend yield (%)	3.5%	3.5%	0.0%	3.6%	3.6-3.9%	0.0%
Expected volatility (%)	26-30%	25%	25%	26-31%	25%	25%
Risk-free interest rate (%)	1.6-2.2%	2.3-3.2%	2.7%	2.0-2.8%	2.8-3.3%	2.9%
Expected life of option (years)	3 or 5	6	6	3 or 5	6	6
Weighted average fair value of options granted (pence)	93.41	77.86	414.06	86.74	64.24	374.00
Probability of forfeiture (%)	14-16%	10%	0%	14-16%	10%	0%
Share price (pence)	436.00	419.89	414.06	378.00	345.23	374.00
Weighted average exercise price (pence)	386.00	419.89	0.00	328.00	338.58	0.00

Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in the Group's option pricing models is the annualised standard deviation of the continuously compounded rates of return on the share over a period of time. In estimating the future volatility of the Company's share price, the Board considers the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the option, taking into account the remaining contractual life of the option.

Share bonus schemes

Eligible UK employees are able to participate in Shares in Success, an all-employee profit-sharing scheme. Each year, shares are awarded as a percentage of earnings up to a statutory maximum of £3,000. Eligible Republic of Ireland employees are able to participate in a Share Bonus Scheme, an all-employee profit-sharing scheme. Each year, employees receive a percentage of their earnings as either cash or shares.

Senior management also participate in performance-related bonus schemes. The amount paid to employees is based on a percentage of salary and is paid partly in cash and partly in shares. Bonuses are awarded to eligible employees who have completed a required service period and depend on the achievement of corporate targets. The accrued cash element of the bonus at the balance sheet date is £38m (2010 – £52m).

Selected senior management participate in the senior management Performance Share Plan. Awards made under this plan will normally vest three years after the date of the award for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets related to the return on capital employed over a three-year performance period.

Senior management in the US business also participate in the US Long-Term Incentive Plan (2007) which was adopted on 29 June 2007. The awards made under this plan will normally vest in four tranches: four, five, six and seven years after the date of award, for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets related to the return on capital employed in the US business over the seven-year plan.

The Executive Directors participate in short-term and long-term bonus schemes designed to align their interests with those of shareholders. Full details of these schemes can be found in the Directors' Remuneration Report.

The fair value of shares awarded under these schemes is their market value on the date of award. Expected dividends are not incorporated into the fair value except for awards under the US Long-Term Incentive Plan.

The number and weighted average fair value (WAFV) of share bonuses awarded during the financial year were:

		2011		2010
	Sharesnumber	WAFVpence	Sharesnumber	WAFVpence
Shares in Success	25,360,677	416.23	28,661,004	349.66
Irish Share Bonus Scheme	141,970	397.70	166,972	359.70
Executive Incentive Scheme	12,765,004	398.68	13,564,595	355.46
Performance Share Plan	2,405,730	399.78	2,120,058	375.37
US Long-Term Incentive Plan	192,078	433.05	80,622	482.00

NOTE 28 POST-EMPLOYMENT BENEFITS

Pensions

The Group operates a variety of post-employment benefit arrangements, covering both funded defined contribution and funded and unfunded defined benefit schemes. The most significant of these are the funded defined benefit pension schemes for the Group's employees in the UK, the Republic of Ireland and South Korea.

Defined contribution plans

The contributions payable for defined contribution schemes of £14m (2010 – £12m) have been recognised in the Group Income Statement.

Defined benefit plans

UK

The principal plan within the Group is the Tesco PLC Pension Scheme, which is a funded defined benefit pension scheme in the UK, the assets of which are held as a segregated fund and administered by trustees. Towers Watson Limited, an independent actuary, carried out the latest triennial actuarial assessment of the scheme as at 31 March 2008, using the projected unit method.

At the date of the last actuarial valuation, the actuarial deficit was £275m. The market value of the schemes' assets was £3,987m and these assets represented 94% of the benefits that had accrued to members, after allowing for expected increases in earnings and pensions in payment.

During the financial year, the Dobbies Pension Scheme was merged into the Tesco PLC Pension Scheme. As the Dobbies Scheme was already part of the Group, there has been no impact on the overall disclosures. The Dobbies Scheme had a net liability of £0.6m at 26 February 2011 which was merged into the Tesco PLC Pension Scheme.

Financial statements

Business review

Governance

Notes to the Group financial statements

NOTE 28 POST-EMPLOYMENT BENEFITS CONTINUED

Overseas

The most significant overseas schemes are the funded defined benefit pension schemes which operate in the Republic of Ireland and South Korea. An independent actuary, using the projected unit method, carried out the latest actuarial assessment of the Republic of Ireland scheme as at 1 April 2010.

The valuations used for IAS 19 have been based on the most recent actuarial valuations and updated by Towers Watson Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes as at 26 February 2011. The schemes' assets are stated at their market values as at 26 February 2011. Towers Watson Limited have updated the most recent Republic of Ireland and South Korea valuations. The liabilities relating to retirement healthcare benefits have also been determined in accordance with IAS 19 and are incorporated in the following tables.

Principal assumptions

During the year the government announced that the Consumer Price Index (CPI) rather than the Retail Price Index (RPI) should be used as the basis of the calculation of inflation for the statutory index-linked features of retirement benefits Accordingly the value of liabilities due to the past service cost of deferred members has been reduced by £270m with the corresponding credit to actuarial gains in the Statement of Comprehensive Income.

The major assumptions, on a weighted average basis, used by the actuaries were as detailed below:

	2011%	2010%
Discount rate	5.9	5.9
Price inflation	3.5	3.6
Rate of increase in salaries	3.6	3.6
Rate of increase in pensions in payment*	3.3	3.4
Rate of increase in deferred pensions*	2.8	3.6
Rate of increase in career average benefits	3.5	3.6

* In excess of any Guaranteed Minimum Pension (GMP) element.

The main financial assumption is the real discount rate (the excess of the discount rate over the rate of price inflation). If this assumption increased/ decreased by 0.1%, the UK defined benefit obligation would decrease/increase by approximately £150m and the annual UK current service cost would decrease/increase by approximately £14m.

UK mortality assumptions

The Company conducts analysis of mortality trends under the Tesco PLC Pension Scheme in the UK as part of the triennial actuarial valuation of the Scheme. At the latest triennial actuarial valuation as at 31 March 2008 the following assumptions were adopted for funding purposes:

Base tables:

PMA92C00 for male members with cohort improvements to 2000 and members taken to be one year younger than actual age. PFA92C00 for female members with cohort improvements to 2000 and members taken to be half a year older than actual age.

These assumptions were used for the calculation of the pension liability as at 26 February 2011 for the main UK scheme.

The mortality assumptions used are based on tables that have been updated in line with medium cohort projections with a minimum improvement of 1% per annum from 31 March 2008 to 26 February 2011. In addition, the allowance for future mortality improvements incorporates medium cohort projections with a minimum improvement of 1% per annum.

The following table illustrates the expectation of life of an average member retiring at age 65 at the balance sheet date and a member reaching age 65 at the same date +25 years:

		2011	2010
		years	years
Retiring at reporting date at age 65:	Male	21.7	21.6
	Female	23.5	23.4
Retiring at reporting date +25 years at age 65:	Male	24.1	24.0
	Female	26.0	25.9

Rates of return on scheme assets

The assets in the defined benefit pension schemes and the expected nominal rates of return were:

		2011		2010
	Long-termrate of return%	Marketvalue£m	Long-termrate of return%	Marketvalue£m
Equities	8.5	3,032	8.7	2,521
Bonds	5.0	1,116	5.1	1,233
Property	6.8	511	7.0	343
Other (alternative assets)	8.5	564	8.7	484
Cash	4.0	385	4.1	115
Total market value of assets		5,608		4,696

The expected rate of return on assets is a weighted average based on the actual plan assets held and the respective returns expected on the separate asset classes. The expected rate of return on equities and cash have both been set having regard to expected returns over the medium term, as calculated by the Company's independent actuary. The expected rate of return on bonds was measured directly from actual yields for gilts and corporate bond stocks. The above rate takes into account the actual mix of UK gilts, UK corporate bonds and overseas bonds held at the balance sheet date.

NOTE 28 POST-EMPLOYMENT BENEFITS CONTINUED

Movement in pension deficit during the year

Changes in the fair value of defined benefit pension plan assets are as follows:

	2011£m	2010£m
Opening fair value of plan assets	4,696	3,420
Expected return	363	265
Actuarial gains	278	733
Contributions by employer	433	415
Actual member contributions	10	9
Foreign currency translation	(9)	(2)
Benefits paid	(163)	(144)
Closing fair value of plan assets	5,608	4,696

Changes in the present value of defined benefit obligations are as follows:

	2011	2010
	£m	£m
Opening defined benefit obligation	(6,536)	(4,914)
Current service cost	(499)	(391)
Past service cost	(29)	–
Interest cost	(381)	(313)
Gain/(loss) on change of assumptions	342	(1,052)
Experience losses	(25)	(1)
Foreign currency translation	11	–
Benefits paid	163	144
Actual member contributions	(10)	(9)
Closing defined benefit obligation	(6,964)	(6,536)

The amounts that have been charged to the Group Income Statement and Group Statement of Comprehensive Income are set out below:

	2011	2010
	£m	£m
Analysis of the amount charged to operating profit:
Current service cost	(499)	(391)
Past service cost	(29)	–
Total charge to operating profit	(528)	(391)
Analysis of the amount (charged)/credited to finance (cost)/income:
Expected return on pension schemes' assets	363	265
Interest on pension schemes' liabilities	(381)	(313)
Net pension finance cost (note 5)	(18)	(48)
Total charge to the Group Income Statement	(546)	(439)
Analysis of the amount recognised in the Group Statement of Comprehensive Income:
Actual return less expected return on pension schemes' assets	278	733
Experience losses arising on the schemes' liabilities	(25)	(1)
Foreign currency translation	2	(2)
Changes in assumptions underlying the present value of the schemes' liabilities	342	(1,052)
Total loss recognised in the Group Statement of Comprehensive Income	597	(322)

The cumulative losses recognised through the Group Statement of Comprehensive Income since the date of transition to IFRS are £539m (2010 – £1,136m).

Summary of movements in deficit during the year

	2011£m	2010£m
Deficit in schemes at beginning of the year	(1,840)	(1,494)
Current service cost	(499)	(391)
Past service cost	(29)	–
Other finance cost	(18)	(48)
Contributions by employer	433	415
Foreign currency translation	2	(2)
Actuarial gain/(loss)	595	(320)
Deficit in schemes at end of the year	(1,356)	(1,840)

F-89

Financial statements

Governance

Overview

Business review

Notes to the Group financial statements

NOTE 28 POST-EMPLOYMENT BENEFITS CONTINUED

History of movements

The historical movement in defined benefit pension schemes' assets and liabilities and history of experience gains and losses are as follows:

	2011£m	2010£m	2009£m	2008£m	2007£m
Total market value of assets	5,608	4,696	3,420	4,089	4,007
Present value of liabilities relating to unfunded schemes	(65)	(54)	(39)	(34)	(27)
Present value of liabilities relating to partially funded schemes	(6,899)	(6,482)	(4,875)	(4,893)	(4,930)
Pension deficit	(1,356)	(1,840)	(1,494)	(838)	(950)
Experience gains/(losses) on scheme assets	278	733	(1,270)	(465)	82
Experience losses on plan liabilities	(25)	(1)	(117)	(20)	(41)

Post-employment benefits other than pensions

The Company operates a scheme offering post-employment healthcare benefits. The cost of providing these benefits has been accounted for on a similar basis to that used for defined benefit pension schemes.

The liability as at 26 February 2011 of £12m (2010 – £12m) was determined in accordance with the advice of independent actuaries. During the financial year, £0.8m (2010 – £0.7m) has been charged to the Group Income Statement and £0.6m (2010 – £0.5m) of benefits were paid.

A change of 1% in assumed healthcare cost trend rates would have the following effect:

	2011	2010
	£m	£m
Effect of a 1% increase in assumed healthcare cost trend rate on:
Service and interest cost	–	–
Defined benefit obligation	2	2
Effect of a 1% decrease in assumed healthcare cost trend rate on:
Service and interest cost	–	–
Defined benefit obligation	(1)	(2)

Expected contributions

The Company expects to make cash contributions of approximately £440m to defined schemes in the financial year ending 25 February 2012.

NOTE 29 CALLED UP SHARE CAPITAL

		2011		2010
		Ordinary shares of 5p each		Ordinary shares of 5p each
	Number	£m	Number	£m
Allotted, called up and fully paid:
At beginning of year	7,985,044,057	399	7,895,344,018	395
Share options	36,535,102	2	62,329,535	3
Share bonus awards	24,888,933	1	27,370,504	1
At end of year	8,046,468,092	402	7,985,044,057	399

During the financial year, 37 million (2010 – 62 million) shares of 5p each were issued in relation to share options for aggregate consideration of £97m (2010 – £166m).

During the financial year, 25 million (2010 – 27 million) shares of 5p each were issued in relation to share bonus awards for consideration of £1m (2010 – £1m).

Between 27 February 2011 and 15 April 2011 options over 2,137,647 ordinary shares have been exercised under the terms of the Savings-related Share Option Scheme (1981) and the Irish Savings-related Share Option Scheme (2000). Between 27 February 2011 and 15 April 2011, options over 1,020,924 ordinary shares have been exercised under the terms of the Executive Share Option Schemes (1994 and 1996) and the Discretionary Share Option Plan (2004).

As at 26 February 2011, the Directors were authorised to purchase up to a maximum in aggregate of 802.1 million (2010 – 790.1 million) ordinary shares.

The owners of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the meetings of the Company.

Capital redemption reserve

Upon cancellation of the shares purchased as part of the share buy-back, a capital redemption reserve is created representing the nominal value of the shares cancelled. This is a non-distributable reserve.

Business review

Governance

NOTE 30 RELATED PARTY TRANSACTIONS

Trading transactions

		Sales torelated parties	Purchases fromrelated parties			Amounts owedby related parties		Amounts owedto related parties
	2011£m	2010£m	2011£m	2010£m	2011£m	2010£m	2011£m	2010£m
Joint ventures	281	154	449	360	18	6	4	18
Associates	3	–	1,104	886	6	–	–	24

Sales to related parties consists of services/management fees and loan interest.

Purchases from related parties include £306m (2010 – £226m) of rentals payable to the Group's joint ventures, including those joint ventures formed as part of the sale and leaseback programme.

Purchases from associates include £1,104m (2010 – £886m) of fuel purchased from Greenergy International Limited.

Non-trading transactions

	Sale and leasebackof assets			Loans torelated parties		Loans fromrelated parties		Injection ofequity funding
	2011£m	2010£m	2011£m	2010£m	2011£m	2010£m	2011£m	2010£m
Joint ventures	1,652	933	502	309	26	23	94	83
Associates	–	–	1	–	–	–	69	–

Transactions between the Group and the Group's pension plans are disclosed in note 28.

A number of the Group's subsidiaries are members of one or more partnerships to whom the provisions of the Partnerships (Accounts) Regulations 2008 ('Regulations') apply. The accounts for those partnerships have been consolidated into these accounts pursuant to Regulation 7 of the Regulations.

On 7 July 2010, the Group formed a limited partnership with Tesco Pension Trustees. The limited partnership contains 41 stores which have been sold from and leased back to the Group. The Group sold assets for proceeds of £958m to the limited partnership. The Group's share of the profit realised from this transaction is included within profit arising on property-related items.

On 9 February 2011, the Group formed a limited partnership with Tesco Pension Trustees. The limited partnership contains 21 stores and one mall under development which have been sold from and leased back to the Group. The Group sold assets for proceeds of £685m to the limited partnership. The Group's share of the profit realised from this transaction is included within profit arising on property-related items.

Transactions with key management personnel

Only members of the Board of Directors of Tesco PLC are deemed to be key management personnel. It is the Board who have responsibility for planning, directing and controlling the activities of the Group. Key management personnel compensation is disclosed in the audited section of the Directors' Remuneration Report.

Transactions on an arm's length basis with Tesco Bank during the financial year were as follows:

		Credit card andpersonal loan balances	Saving deposit accounts
	Number of keymanagementpersonnel	£m	Number of keymanagementpersonnel	£m
At 26 February 2011	7	–	10	1
At 27 February 2010	–	–	4	1

During the current and prior financial years, there were no other material transactions or balances between the Group and its key management personnel or their close family members.

Notes to the Group financial statements

NOTE 31 RECONCILIATION OF PROFIT BEFORE TAX TO CASH GENERATED FROM OPERATIONS

	2011£m	2010£m
Profit before tax	3,535	3,176
Net finance costs (note 5)	333	314
Share of post-tax profits of joint ventures and associates (note 13)	(57)	(33)
Operating profit	3,811	3,457
Depreciation and amortisation	1,420	1,384
Profit arising on property-related items (note 3)	(427)	(377)
Loss arising on sale of non property-related items	3	5
Impairment of goodwill (note 10)	55	131
Net reversal of impairment of property, plant and equipment (note 11) and investment property (note 12)	(13)	(26)
Adjustment for non-cash element of pensions charge	95	(24)
Share-based payments (note 27)	220	241
(Increase)/decrease in inventories	(467)	34
(Increase)/decrease in trade and other receivables	(152)	124
Increase in trade and other payables	976	453
Tesco Bank increase in loans and advances to customers (note 17)	(529)	(724)
Tesco Bank (increase)/decrease in loans and advances to banks, other financial assets and trade and other receivables	(356)	1,369
Tesco Bank increase/(decrease) in customer and bank deposits, trade and other payables and other financial liabilitiesincluding borrowings	730	(100)
Increase in working capital	202	1,156
Cash generated from operations	5,366	5,947

The increase in working capital includes the impact of translating foreign currency working capital movements at average exchange rates rather than year end exchange rates.

NOTE 32 ANALYSIS OF CHANGES IN NET DEBT

	At27 February2010£m*	Tesco Bank at27 February2010£m	Cash flow£m	Businesscombinations£m	Othernon-cashmovements£m	Eliminationof Tesco Bank£m	At26 February2011£m*
Cash and cash equivalents	2,615	204	(903)	–	(46)	(148)	1,722
Short-term investments	1,314	–	(292)	–	–	–	1,022
Joint venture loan and other receivables	320	–	189	–	18	(34)	493
Bank and other borrowings	(12,584)	(480)	2,456	–	(269)	595	(10,282)
Finance lease payables	(209)	–	42	(17)	(14)	–	(198)
Net derivative financial instruments	615	(63)	7	–	(127)	21	453
	(7,929)	(339)	1,499	(17)	(438)	434	(6,790)

* These amounts relate to the net debt excluding Tesco Bank.

NOTE 33 BUSINESS COMBINATIONS AND OTHER ACQUISITIONS

Business combinations

			Provisional
	Pre-acquisitioncarrying values£m	Fair valueadjustment£m	fair values onacquisition£m
Non-current assets	45	7	52
Current assets	9	(1)	8
Current liabilities	(6)	(1)	(7)
Non-current liabilities	(8)	(11)	(19)
Net assets acquired	40	(6)	34
Goodwill arising on acquisition			82
			116
Consideration:
Cash			45
Non-cash			71
Total consideration			116

The goodwill represents the benefit of supply chain efficiencies, production economies, the ability to develop new and innovative products and further third-party revenue potential.

Other acquisitions

On 18 May 2010 the Group acquired an additional 13% of the ordinary share capital of Greenergy International Limited for a cash consideration of £16m, taking the Group's holding to 34%.

On 21 June 2010 the Group completed the acquisition of the remaining 10% of the ordinary share capital of dunnhumby Limited for a cash consideration of £44m, with a further contingent consideration of £16m.

NOTE 34 COMMITMENTS AND CONTINGENCIES

Capital commitments

At 26 February 2011 there were commitments for capital expenditure contracted for, but not provided for, £1,719m (2010 – £1,835m), principally relating to the store development programme.

Contingent liabilities

The Company has irrevocably guaranteed the liabilities, as defined in Section 5(c) of the Republic of Ireland (Amendment Act) 1986, of various subsidiary undertakings incorporated in the Republic of Ireland.

For details of assets held under finance leases, which are pledged as security for the finance lease liabilities, see note 11.

There are a number of contingent liabilities that arise in the normal course of business which if realised are not expected to result in a material liability to the Group. The Group recognises provisions for liabilities when it is more likely than not a settlement will be required and the value of such a payment can be reliably estimated.

On 30 April 2010 the Office of Fair Trading announced that it had decided to drop allegations against the Group in relation to alleged collusion between certain supermarkets and dairy processors in relation to milk and butter. The only investigation that remains open is in relation to certain cheese products. The Group continues to defend its position vigorously and no provision has been recognised in the Group's financial statements.

Tesco Bank

At 26 February 2011 Tesco Bank has commitments of formal standby facilities, credit lines and other commitments to lend, totalling £7.1bn (2010 – £6.5bn). The amount is intended to provide an indication of the potential volume of business and not of the underlying credit or other risks.

The FSCS meets its obligations by raising management expense levies. These include amounts to cover the interest on its borrowings and compensation levies on the industry. Each deposit-taking institution contributes in proportion to its share of total protected deposits. The levy is calculated based on deposit balances held as at 31 December in each year and, as such, this is seen as the 'trigger event' under accounting rules.

Overview

Business review

Governance

Notes to the Group financial statements

NOTE 35 CAPITAL RESOURCES

The following table shows the composition of regulatory capital resources of Tesco Personal Finance PLC (TPF), being the regulated entity, at the balance sheet date:

	2011£m	2010£m
Tier 1 capital:
Shareholders' funds and non-controlling interests	761	576
Tier 2 capital:
Qualifying subordinated debt	235	235
Other interests	18	21
Supervisory deductions	(365)	(263)
Total regulatory capital	649	569

The movement of tier 1 capital during the financial year is analysed as follows:

	2011£m	2010£m
At beginning of year	576	521
Share capital and share premium	446	230
Profit attributable to shareholders	57	37
Ordinary dividends	(162)	(153)
Increase in intangible assets	(156)	(59)
At end of year	761	576

NOTE 36 LEASING COMMITMENTS

Finance lease commitments – Group as lessee

The Group has finance leases for various items of plant, equipment, fixtures and fittings. There are also a small number of buildings which are held under finance leases. The fair value of the Group's lease obligations approximate to their carrying value.

Future minimum lease payments under finance leases and hire purchase contracts, together with the present value of the net minimum lease payments, are as follows:

	Minimum lease payments		minimum lease payments	Present value of
	2011£m	2010£m	2011£m	2010£m
Within one year	56	49	50	45
Greater than one year but less than five years	81	101	44	90
After five years	206	178	104	74
Total minimum lease payments	343	328	198	209
Less future finance charges	(145)	(119)
Present value of minimum lease payments	198	209
Analysed as:
Current finance lease payables	50	45
Non-current finance lease payables	148	164
	198	209

NOTE 36 LEASING COMMITMENTS CONTINUED

Operating lease commitments – Group as lessee

Future minimum rentals payable under non-cancellable operating leases are as follows:

	2011	2010
	£m	£m
Within one year	1,138	1,043
Greater than one year but less than five years	4,246	3,702
After five years	10,631	10,004
Total minimum lease payments	16,015	14,749

Future minimum rentals payable under non-cancellable operating leases after five years are analysed further as follows:

	2011£m	2010£m
Greater than five years but less than ten years	4,203	3,610
Greater than ten years but less than fifteen years	3,023	2,894
After fifteen years	3,405	3,500
Total minimum lease payments – after five years	10,631	10,004

Operating lease payments represent rentals payable by the Group for certain of its retail, distribution and office properties and other assets such as motor vehicles. The leases have varying terms, purchase options, escalation clauses and renewal rights.

The Group has lease break options on certain sale and leaseback transactions, which are exercisable if an existing option to buy back leased assets at market value at a specified date is also exercised, no commitment has been included in respect of the buy-back option as the option is at the Group's discretion. The Group is not obliged to pay lease rentals after that date, therefore minimum lease payments exclude those falling after the buy-back date.

Operating lease commitments with joint ventures

Since 1988 the Group has entered into several joint ventures and sold and leased back properties to and from these joint ventures. The terms of these sale and leasebacks vary, however, common factors include: the sale of the properties to the joint venture at market value; options within the lease for the Group to repurchase the properties at market value; market rent reviews; and 20 to 30 full-year lease terms. The Group reviews the substance as well as the form of the arrangements when determining the classification of leases as operating or finance; all of the leases under these arrangements are operating leases.

Operating lease receivables – Group as lessor

The Group both rents out its properties and also sublets various leased buildings under operating leases. At the balance sheet date, the following future minimum lease payments are contractually receivable from tenants:

	2011£m	2010£m
Within one year	286	259
Greater than one year but less than five years	537	566
After five years	306	348
Total minimum lease payments	1,129	1,173

Overview

Business review

Governance

Independent auditors' report to the members of Tesco PLC

We have audited the Group financial statements of Tesco PLC for the 52 weeks ended 27 February 2010 which comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group Balance Sheet, the Group Cash Flow Statement, the Group Statement of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Respective responsibilities of directors and auditors

As explained more fully in the Statement of Directors' responsibilities set out on page 68, the Directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

Opinion on financial statements

In our opinion the Group financial statements:

give a true and fair view of the state of the Group's affairs as at 27 February 2010 and of its profit and cash flows for the 52 weeks then ended;
have been properly prepared in accordance with IFRSs as adopted by the European Union; and
have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006 In our opinion:

• the information given in the Directors' Report for the 52 weeks ended 27 February 2010 for which the Group financial statements are prepared is consistent with the Group financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following:

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

certain disclosures of Directors' remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit; or
a corporate governance statement has not been prepared by the Parent Company.

Under the Listing Rules we are required to review:

the Directors' statement, set out on page 45, in relation to going concern; and
the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the June 2008 Combined Code specified for our review.

Other matter

We have reported separately on the Parent Company financial statements of Tesco PLC for the 52 weeks ended 27 February 2010 and on the information in the Directors' Remuneration Report that is described as having been audited.

Richard Winter (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 5 May 2010

Group income statement

		52 weeks2010	53 weeks2009Restated*
Year ended 27 February 2010	notes	£m	£m
Continuing operations
Revenue (sales excluding VAT)	2	56,910	53,898
Cost of sales		(52,303)	(49,713)
Gross profit		4,607	4,185
Administrative expenses		(1,527)	(1,252)
Profit arising on property-related items	3	377	236
Operating profit		3,457	3,169
Share of post-tax profits of joint ventures and associates	13	33	110
Finance income	5	265	116
Finance costs	5	(579)	(478)
Profit before tax	3	3,176	2,917
Taxation	6	(840)	(779)
Profit for the year		2,336	2,138
Attributable to:
Owners of the parent		2,327	2,133
Minority interests		9	5
		2,336	2,138
Earnings per share
Basic	9	29.33p	27.14p
Diluted	9	29.19p	26.96p
* See note 1 Accounting policies.

Non-GAAP measure: underlying profit before tax		52 weeks2010	53 weeks2009
	notes	£m	Restated*£m
Profit before tax		3,176	2,917
Adjustments for:
IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements	1/5	(151)	88
IAS 19 Non-cash Income Statement charge for pensions	28	24	27
IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods	1	41	27
IFRS 3 Amortisation charge from intangible assets arising on acquisition	1	127	32
IFRIC 13 'Customer Loyalty Programmes' – fair value of awards	1	14	33
Exceptional items:
IAS 36 Impairment of goodwill arising on acquisitions	1	131	–
Restructuring costs	1	33	–
Underlying profit before tax	1	3,395	3,124
* See note 1 Accounting policies.

Group statement of comprehensive income

		52 weeks2010	53 weeks2009
Year ended 27 February 2010	notes	£m	Restated*£m
Change in fair value of available-for-sale financial assets and investments		1	3
Currency translation differences		343	(275)
Total loss on defined benefit pension schemes	28	(322)	(629)
(Losses)/gains on cash flow hedges:
Net fair value (losses)/gains		(168)	505
Reclassified and reported in the Group Income Statement		5	(334)
Tax relating to components of other comprehensive income	6	54	375
Total other comprehensive income		(87)	(355)
Profit for the year		2,336	2,138
Total comprehensive income for the year		2,249	1,783
Attributable to:
Owners of the parent		2,222	1,784
Minority interests		27	(1)
		2,249	1,783

* See note 1 Accounting policies.

Group balance sheet

		27 February2010	28 February2009	24 February2008
	notes	£m	Restated*£m	Restated*£m
Non-current assets
Goodwill and other intangible assets	10	4,177	4,076	2,336
Property, plant and equipment	11	24,203	23,152	19,787
Investment property	12	1,731	1,539	1,112
Investments in joint ventures and associates	13	152	62	305
Other investments	14	863	259	4
Loans and advances to customers	17	1,844	1,470	–
Derivative financial instruments	22	1,250	1,478	216
Deferred tax assets	6	38	49	104
		34,258	32,085	23,864
Current assets
Inventories	15	2,729	2,669	2,430
Trade and other receivables	16	1,888	1,820	1,311
Loans and advances to customers	17	2,268	1,918	–
Loans and advances to banks and other financial assets	18	144	1,541	–
Derivative financial instruments	22	224	382	97
Current tax assets		6	9	6
Short-term investments		1,314	1,233	360
Cash and cash equivalents	19	2,819	3,509	1,788
		11,392	13,081	5,992
Non-current assets classified as held for sale	7	373	398	308
		11,765	13,479	6,300
Current liabilities
Trade and other payables	20	(9,442)	(8,665)	(7,359)
Financial liabilities
Borrowings	21	(1,529)	(3,471)	(2,084)
Derivative financial instruments and other liabilities	22	(146)	(525)	(443)
Customer deposits	24	(4,357)	(4,538)	–
Deposits by banks	25	(30)	(24)	–
Current tax liabilities		(472)	(362)	(455)
Provisions	26	(39)	(10)	(4)
		(16,015)	(17,595)	(10,345)
Net current liabilities		(4,250)	(4,116)	(4,045)
Non-current liabilities
Financial liabilities
Borrowings	21	(11,744)	(12,391)	(5,972)
Derivative financial instruments and other liabilities	22	(776)	(302)	(322)
Post-employment benefit obligations	28	(1,840)	(1,494)	(838)
Deferred tax liabilities	6	(795)	(676)	(791)
Provisions	26	(172)	(200)	(23)
		(15,327)	(15,063)	(7,946)
Net assets		14,681	12,906	11,873
Equity
Share capital		399	395	393
	29
Share premium accountOther reserves		4,80140	4,63840	4,51140

Retained earnings		9,356	7,776	6,842
Equity attributable to owners of the parent		14,596	12,849	11,786
Minority interests		85	57	87
Total equity		14,681	12,906	11,873

* See note 1 Accounting policies.

Sir Terry Leahy Laurie McIlwee

Directors

The financial statements on pages 70 to 120 were authorised for issue by the Directors on 5 May 2010 and are subject to the approval of the shareholders at the Annual General Meeting on 2 July 2010.

Group statement of changes in equity

				Attributable to owners of the parent
	Issuedsharecapital£m	Sharepremium£m	reserves£m	CapitalOther redemptionreserve£m	Hedgingreserve£m	Translationreserve£m	Treasuryshares£m	Retainedearnings£m	Total£m	Minorityinterests£m	Totalequity£m
At 28 February 2009 (restated*)	395	4,638	40	13	175	173	(229)	7,644	12,849	57	12,906
Profit for the year	–	–	–	–	–	–	–	2,327	2,327	9	2,336
Other comprehensive income
Change in fair value ofavailable-for-sale financial assets	–	–	–	–	–	–	–	1	1	–	1
Currency translation differences	–	–	–	–	–	325	–	–	325	18	343
Loss on defined benefit schemes	–	–	–	–	–	(2)		(320)	(322)	–	(322)
Loss on cash flow hedges	–	–	–	–	(163)	–	–	–	(163)	–	(163)
Tax on components of othercomprehensive income	–	–	–	–	–	(33)	–	87	54	–	54
Total other comprehensive income	–	–	–	–	(163)	290	–	(232)	(105)	18	(87)
Total comprehensive income	–	–	–	–	(163)	290	–	2,095	2,222	27	2,249
Transactions with owners
Purchase of treasury shares	–	–	–	–	–	–	(24)	–	(24)	–	(24)
Share-based payments	–	–	–	–	–	–	73	168	241	–	241
Issue of shares	4	163	–	–	–	–	–	–	167	–	167
Purchase of minority interest	–	–	–	–	–	–	–	91	91	3	94
Dividends paid to minority interests	–	–	–	–	–	–	–	–	–	(2)	(2)
Dividends authorised in the year	–	–	–	–	–	–	–	(968)	(968)	–	(968)
Tax on items charged to equity	–	–	–	–	–	–	–	18	18	–	18
Transactions with owners	4	163	–	–	–	–	49	(691)	(475)	1	(474)
At 27 February 2010	399	4,801	40	13	12	463	(180)	9,048	14,596	85	14,681

							Attributable to owners of the parent
	Issuedsharecapital£m	Sharepremium£m	reserves£m	CapitalOther redemptionreserve£m	Hedgingreserve£m	Translationreserve£m	Treasuryshares£m	Retainedearnings£m	Total£m	Minorityinterests£m	Totalequity£m
At 23 February 2008	393	4,511	40	12	4	245	(204)	6,814	11,815	87	11,902
IFRIC 13 restatement	–	–	–	–	–	–	–	(29)	(29)	–	(29)
At 23 February 2008 (restated*)	393	4,511	40	12	4	245	(204)	6,785	11,786	87	11,873
Profit for the year	–	–	–	–	–	–	–	2,133	2,133	5	2,138
Other comprehensive income
Change in fair value ofavailable-for-sale investments	–	–	–	–	–	–	–	3	3	–	3
Currency translation differences	–	–	–	–	–	(269)	–	–	(269)	(6)	(275)
Loss on defined benefit schemes	–	–	–	–	–	(2)	–	(627)	(629)	–	(629)
Gains on cash flow hedges	–	–	–	–	171	–	–	–	171	–	171
Tax on components of othercomprehensive income	–	–	–	–	–	199	–	176	375	–	375
Total other comprehensive income	–	–	–	–	171	(72)	–	(448)	(349)	(6)	(355)
Total comprehensive income	–	–	–	–	171	(72)	–	1,685	1,784	(1)	1,783
Transactions with owners
Purchase of treasury shares	–	–	–	–	–	–	(165)	–	(165)	–	(165)
Share-based payments	–	–	–	–	–	–	140	68	208	–	208
Issue of shares	3	127	–	–	–	–	–	–	130	–	130
Share buy-backs	(1)	–	–	1	–	–	–	–	–	–	–
Purchase of minority interest	–	–	–	–	–	–	–	–	–	(26)	(26)
Dividends paid to minority interests	–	–	–	–	–	–	–	–	–	(3)	(3)
Fair value reserve arisingon acquisition of Tesco Bank	–	–	–	–	–	–	–	(71)	(71)	–	(71)
Dividends authorised in the year	–	–	–	–	–	–	–	(883)	(883)	–	(883)
Tax on items charged to equity	–	–	–	–	–	–	–	60	60	–	60
Transactions with owners	2	127	–	1	–	–	(25)	(826)	(721)	(29)	(750)
At 28 February 2009 (restated*)	395	4,638	40	13	175	173	(229)	7,644	12,849	57	12,906

* See note 1 Accounting policies.

Group cash flow statement

Year ended 27 February 2010notes	52 weeks2010£m	53 weeks2009£m
Cash flows from operating activities
Cash generated from operations31	5,947	4,978
Interest paid	(690)	(562)
Corporation tax paid	(512)	(456)
Net cash from operating activities	4,745	3,960
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired	(65)	(1,275)
Proceeds from sale of property, plant and equipment	1,820	994
Purchase of property, plant and equipment and investment property	(2,855)	(4,487)
Proceeds from sale of intangible assets	4	–
Purchase of intangible assets	(163)	(220)
Increase in loans to joint ventures	(45)	(242)
Investments in joint ventures and associates	(4)	(30)
Investments in short-term and other investments	(1,918)	(1,233)
Proceeds from sale of short-term investments	1,233	360
Dividends received	35	69
Interest received	81	90
Net cash used in investing activities	(1,877)	(5,974)
Cash flows from financing activities
Proceeds from issue of ordinary share capital	167	130
Increase in borrowings	862	7,387
Repayment of borrowings	(3,601)	(2,733)
Repayment of obligations under finance leases	(41)	(18)
Dividends paid	(968)	(883)
Dividends paid to minority interests	(2)	(3)
Own shares purchased	(24)	(265)
Net cash from financing activities	(3,607)	3,615
Net (decrease)/increase in cash and cash equivalents	(739)	1,601
Cash and cash equivalents at beginning of year	3,509	1,788
Effect of foreign exchange rate changes	49	120
Cash and cash equivalents at end of year19	2,819	3,509

Reconciliation of net cash flow to movement in net debt note

	52 weeks2010	53 weeks2009
Year ended 27 February 2010note	£m	£m
Net (decrease)/increase in cash and cash equivalents	(739)	1,601
Investment in Tesco Bank	(230)	–
Elimination of net increase in Tesco bank cash and cash equivalents	(167)	(37)
Debt acquired on acquisition of Homever	–	(611)
Transfer of joint venture loan receivable on acquisition of Tesco Bank	–	(91)
Net cash inflow/(outflow) from debt and lease financing	2,780	(4,636)
Dividend received from Tesco Bank	150	–
Increase in short-term investments	81	873
Increase in joint venture loan receivables	45	242
Other non-cash movements	(249)	(759)
Decrease/(increase) in net debt in the year	1,671	(3,418)
Opening net debt32	(9,600)	(6,182)
Closing net debt32	(7,929)	(9,600)

NB. The reconciliation of net cash flow to movement in net debt note is not a primary statement and does not form part of the cash flow statement and forms part of the notes to the financial statements.

Note 1 Accounting policies

General information

The financial year represents the 52 weeks ended 27 February 2010 (prior financial year 53 weeks ended 28 February 2009 and includes 53 weeks of trading for the UK, Republic of Ireland (ROI) and United States of America (US) businesses).

As described in the Report of the Directors, the main activity of the Group is that of retailing, retailing services and financial services.

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretation Committee (IFRIC) interpretations as endorsed by the European Union, and those parts of the Companies Act applicable to companies reporting under IFRS.

Basis of preparation

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

Basis of consolidation

Where necessary, adjustments are made to the financial statements of subsidiaries, joint ventures and associates to bring the accounting policies used into line with those of the Group.

Subsidiaries

A subsidiary is an entity whose operating and financing policies are controlled, directly or indirectly, by Tesco PLC.

The accounts of the Parent Company's subsidiary undertakings are prepared to dates around the Group year end.

The financial statements of subsidiaries are included in the consolidated 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

A joint venture is an entity in which the Group holds an interest on a longterm basis and which is jointly controlled by the Group and one or more other venturers under a contractual agreement.

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

Use of assumptions and estimates

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Critical estimates and assumptions are made in particular with regard to establishing uniform depreciation and amortisation periods for the Group, impairment testing (including loans), provisions for onerous leases and other provisions, assumptions for measuring pension provisions and fair value of share-based payments, determination of the fair value of obligations to purchase minority interests and fair value of derivative financial instruments, classification of leases as operating leases versus finance leases (including on sale and leasebacks), the likelihood that tax assets can be realised and the classification of certain operations as held for sale.

Changes in accounting policy and disclosure

The Group has adopted the following new and amended standards and interpretations as of 1 March 2009:

IFRIC 13 'Customer Loyalty Programmes', effective for annual periods beginning on or after 1 July 2008, requires customer loyalty awards to be accounted for as a separate component of the sales transaction in which they are granted. Part of the fair value of the consideration received relating to the customer loyalty awards is deferred and subsequently recognised over the period in which the awards are redeemed. The results for the 53 weeks ended 28 February 2009 have been restated accordingly. The impact on the Group Income Statement for the year ended 28 February 2009, is a £429m reduction in total revenue, £396m reduction in cost of sales and a £9m decrease to the taxation charge for the year. The net impact is a decrease of £33m to profit before tax and £24m to profit after tax. The net impact to the Group Balance Sheet as at 28 February 2009 is a £53m reduction in shareholders' equity, £73m increase in trade and other payables and a £20m reduction in the provision for deferred tax. The net impact to the Group Balance Sheet as at 24 February 2008 is a £29m reduction in shareholders' equity, £40m increase in trade and other payables and an £11m reduction in the provision for deferred tax. The prior year effect of the restatement on basic and diluted earnings per share is a reduction of 0.36p per share, and 0.35p per share, respectively.
Amendment to IFRS 2 'Share-Based Payment' Vesting Conditions and Cancellations, effective for annual periods beginning on or after 1 January 2009 clarifies that only service and performance conditions are vesting conditions. Any other conditions are non-vesting conditions which have to be taken into account to determine the fair value of the equity instruments granted. The award must be treated as a cancellation where the award does not vest as a result of a failure to meet a nonvesting condition that is within the control of either the Group or the counterparty. Cancellations are treated as accelerated vestings and all remaining future charges are immediately recognised in the Group Income Statement with the credit recognised directly in equity. The results for the year ended 28 February 2009 have been restated accordingly. The impact on the Group Income Statement, Group Balance Sheet, basic and diluted earnings per share for the prior year was not material.

Financial statements

Notes to the Group financial statements continued

Note 1 Accounting policies continued

IFRS 8 'Operating Segments', effective for annual periods beginning on or after 1 January 2009 replaces IAS 14 'Segment Reporting' and requires operating segments to be reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for resource allocation and assessing performance of the operating segments, the key performance measure being trading profit, has been identified as the Executive Committee of the Board of Directors.
IAS 1 (revised) 'Presentation of Financial Statements', effective for annual periods beginning on or after 1 January 2009, prohibits the presentation of items of income and expenses (that is, 'non-owner changes in equity') in the Group Statement of Changes in Equity, and requiring 'non-owner changes in equity' to be presented in a performance statement. The Group has elected to present two statements: a Group Income Statement and a Group Statement of Comprehensive Income. The consolidated financial information has been prepared under the revised disclosure requirements. There was no impact on the results or net assets of the Group. Due to the adoption of IFRIC 13 and the amendments to IFRS 2, a Group Balance Sheet as at 24 February 2008 has been presented as required by IAS 1 (revised) when there is a retrospective restatement.
Amendments to IFRS 7 'Financial Instruments Disclosures', effective for annual periods beginning on or after 1 January 2009 requires enhanced disclosures about fair value measurement and liquidity risk.

Sale and repurchase agreement (Tesco Bank)

• In order to align with emerging industry practice the Treasury Bills and related Medium Term Notes previously recognised have been restated in Group Balance Sheet as at 28 February 2009. These balances arose as a result of a securitisation and associated sale and repurchase agreement entered into as part of the Special Liquidity Scheme during the year ended 28 February 2009. The effect of the change in the prior year is a reduction in loans and advances to banks and other financial assets of £588m, with a related reduction in current borrowings.

IFRS 3 Business combinations

Under IFRS 3 'Business Combinations', any adjustments to the provisional fair values allocated within 12 months of an acquisition date are calculated as if the fair value at the acquisition date had been recognised from that date. As a result, goodwill relating to the following acquisitions has been restated:

Homever (acquired 30 September 2008) the net impact of the restatement is an increase in goodwill of £14m, increase in trade and other receivables of £22m, increase in trade and other payables of £2m and increase in non-current provisions of £34m.
Tesco Bank (acquired on 19 December 2008) the net impact of the restatement is an increase in goodwill of £35m, increase in deferred tax assets of £28m, increase in non-current provisions of £99m and a decrease in retained earnings of £36m.

Revenue

Retailing

Revenue consists of sales through retail outlets.

Revenue is recorded net of returns, relevant vouchers/offers and valueadded taxes, when the significant risks and rewards of ownership have been transferred to the buyer. Relevant vouchers/offers include: money-off coupons, conditional spend vouchers and offers such as buy one get one free (BOGOF) and 3 for 2.

Commission income is recorded based on the terms of the contracts and is recognised when the service is provided.

Financial Services

Revenue consists of interest, fees and commission receivable.

Interest income on financial assets that are classified as loans and

bl d d h ff h d Th

group of assets, and of allocating the interest income over the expected life of the asset. The effective interest rate is the rate that discounts the estimated future cash flows to the instrument's initial carrying amount. 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.

Fees in respect of services are recognised on an accruals basis as service is provided. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable. Significant fee types include credit card related services fees such as interchange, late payment and balance transfer fees.

The Group receives insurance commission from the sale of general insurance policies, which is dependent on the profitability of the underlying insurance policies.

Clubcard and loyalty initiatives

Computers for Schools and Sport for Schools and Club vouchers are issued by Tesco for redemption by participating schools/clubs and are part of our overall Community Plan. The cost of the redemption (i.e. meeting the obligation attached to the vouchers) is treated as a cost rather than a deduction from sales.

Other income

Finance income, excluding income arising from financial services, is recognised in the period to which it relates using the effective interest rate method. Dividends are recognised when a legal entitlement to receive payment arises.

Operating profit

Operating profit is stated after profit arising on property-related items but before the share of results of joint ventures and associates, finance income and finance costs.

Property, plant and equipment

Property, plant and equipment assets are carried at cost less accumulated depreciation and any recognised impairment in value.

Property, plant and equipment assets are depreciated on a straight-line basis to their residual value over their anticipated useful economic lives.

The following depreciation rates are applied for the Group:

freehold and leasehold buildings with greater than 40 years unexpired at 2.5% of cost;
leasehold properties with less than 40 years unexpired are depreciated by equal annual instalments over the unexpired period of the lease; and
plant, equipment, fixtures and fittings and motor vehicles at rates varying from 9% to 50%.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, when shorter, over the term of the relevant lease.

All property, plant and equipment are reviewed for impairment in accordance with IAS 36 'Impairment of Assets' when there are indications that the carrying value may not be recoverable.

Borrowing costs

Borrowing 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.

Investment property

Leasing

The Group as a lessor

Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease.

The Group as a lessee

Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability is included in the Group Balance Sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the Group Income Statement.

Rentals payable under operating leases are charged to the Group Income Statement on a straight-line basis over the term of the relevant lease.

Sale and leaseback

A sale and leaseback transaction is one where a vendor sells an asset and immediately reacquires the use of that asset by entering into a lease with the buyer. The accounting treatment of the sale and leaseback depends upon the substance of the transaction (by applying the lease classification principles described above) and whether or not the sale was made at the asset's fair value.

For sale and finance leasebacks, any apparent profit or loss from the sale is deferred and amortised over the lease term. For sale and operating leasebacks, generally the assets are sold at fair value, and accordingly the profit or loss from the sale is recognised immediately in the Group Income Statement.

Following initial recognition, the lease treatment is consistent with those principles described above.

Business combinations and goodwill

All business combinations are accounted for by applying the purchase method.

The Group recognises intangible assets as part of business combinations at fair value on the date of acquisition. The determination of these fair values is based upon management's judgement and includes assumptions on the timing and amount of future incremental cash flows generated by the assets acquired and the selection of an appropriate cost of capital. The useful lives of intangible assets are estimated, and amortisation charged on a straight-line basis.

Goodwill arising on consolidation represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets/net liabilities of the acquired subsidiary, joint venture or associate at the date of acquisition. If the cost of acquisition is less than the fair value of the Group's share of the net assets/net liabilities of the acquired entity (i.e. a discount on acquisition) then the difference is credited to the Group Income Statement in the period of acquisition.

Any impairment is recognised immediately in the Group Income Statement and is not subsequently reversed.

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.

Intangible assets

Acquired intangible assets

Acquired intangible assets, such as software, pharmacy licences, customer relationships, contracts and brands, are measured initially at cost and are amortised on a straight-line basis over their estimated useful lives, at 2%-100% of cost per annum.

Internally-generated intangible assets – Research and development expenditure

Research costs are expensed as incurred.

Development expenditure incurred on an individual project is carried forward only if all the criteria set out in IAS 38 'Intangible Assets' are met, namely:

an asset is created that can be identified (such as software or new processes);
it is probable that the asset created will generate future economic benefits; and
the development cost of the asset can be measured reliably.

Following the initial recognition of development expenditure, the cost is amortised over the project's estimated useful life, usually at 14%-25% of cost per annum.

Financial statements

Impairment of tangible and intangible assets excluding goodwill

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets are impaired. If such indication exists, the recoverable

Notes to the Group financial statements continued

Note 1 Accounting policies continued

amount of the asset is estimated in order to determine the extent of the impairment loss (if any). 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 to sell, and value in use. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss 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 as a credit to the Group Income Statement immediately.

Other investments

Other investments in the Group Balance Sheet comprise loan receivable and available-for-sale financial assets. Refer to the financial instruments accounting policy for further detail.

Loan receivables are recognised at amortised cost and available-for-sale financial assets are recognised at fair value.

Inventories

Short-term investments

Short-term investments in the Group Balance Sheet consist of deposits with money market funds.

Cash and cash equivalents

Non-current assets held for sale

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Pensions and similar obligations

The Group accounts for pensions and other post-employment benefits (principally private healthcare) under IAS 19 'Employee Benefits'.

In respect of defined benefit plans, obligations are measured at discounted present value (using the projected unit credit method) whilst 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.

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

Share-based payments

Employees of the Group receive part of their remuneration in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions) or in exchange for entitlements to cash payments based on the value of the shares (cash-settled transactions).

The fair value of employee share option plans is calculated at the grant date using the Black-Scholes model. In accordance with IFRS 2 'Share-Based Payment', 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 year, using tax rates enacted or substantively enacted by the balance sheet date. Tax is recognised in the Group Income Statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised other comprehensive income or equity, respectively.

Deferred tax is calculated at 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 equity or other comprehensive income, 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.

Foreign currencies

The financial statements of foreign subsidiaries are translated into Pounds Sterling according to the functional currency concept of IAS 21 'The Effects of Changes in Foreign Exchange Rates'. Since the majority of consolidated companies operate as independent entities within their local economic environment, their respective local currency is the functional currency. Therefore, assets and liabilities of overseas subsidiaries denominated in foreign currencies are translated at exchange rates prevailing at the date of the Group Balance Sheet; profits and losses are translated into Pounds Sterling at average exchange rates for the relevant accounting periods. Exchange differences arising, if any, are classified as equity and transferred to 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 on the Group's Balance Sheet when the Group becomes a party to the contractual provisions of the instrument.

Trade receivables

Trade receivables are non interest-bearing and are recognised initially at fair value, and subsequently at amortised cost using the effective interest rate method, reduced by appropriate allowances for estimated irrecoverable amounts.

Investments

Investments are recognised at trade date. Investments are classified as either held for trading or available-for-sale, and are recognised at fair value.

There are no investments classified as held for trading.

Loans and advances

Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and include amounts due from customers and amounts due from other banks. The Group has no intention of trading these loans and advances and consequently they are not classified as held for trading or designated as fair value through profit and loss. 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 impairment losses. Income from these financial assets is calculated on an effective yield basis and is recognised in the Group Income Statement.

Impairment of loans and advances

At each balance sheet date, the Group reviews the carrying amounts of its loans and advances to determine whether there is any indication that those assets have suffered an impairment loss. An impairment loss has been incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.

period the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.

Loan impairment provisions are established on a portfolio basis taking into account the level of arrears, security, past loss experience, credit scores and defaults based on portfolio trends. The most significant factors in establishing the provisions are the expected loss rates and the related average life. The portfolios include credit card receivables and other personal advances. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, the unemployment level, payment behaviour and bankruptcy trends.

Financial liabilities and equity instruments

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 cost 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 stated at amortised cost.

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

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

Fair value hedging

Derivative financial instruments qualifying for fair value hedge accounting are principally interest rate swaps and cross currency swaps.

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 instrument is recognised directly in equity.

The associated cumulative gain or loss is removed from equity and recognised in the Group Income Statement in the same period or periods during which the hedged transaction affects the Group Income Statement. The classification of the effective portion when recognised in the Group Income Statement is the same as the classification of the hedged transaction. Any element of the remeasurement of the derivative instrument which does not meet the criteria for an effective hedge is recognised immediately in the Group Income Statement within finance income or costs.

Derivative instruments qualifying for cash flow hedging are principally forward foreign exchange transactions and interest rate swaps.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs or the original hedged item affects the Group Income Statement. If a forecasted hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the Group Income Statement.

Net investment hedging

Derivative 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 derivative instrument is recognised directly in equity. Any ineffective element is recognised immediately in the Group Income Statement. Gains and losses accumulated in equity are included in the Group Income Statement when the foreign operation is disposed of.

Derivative instruments qualifying for net investment hedging are principally forward foreign exchange transactions.

Treatment of agreements to acquire minority interests

The Group has entered into a number of agreements to purchase the remaining shares of subsidiaries with minority shareholdings.

Under IAS 32 'Financial Instruments: Presentation', the net present value of the expected future payments are shown as a financial liability. At the end of each period, the valuation of the liability is reassessed with any changes recognised in the Group Income Statement within finance income or costs for the year. Where the liability is in a currency other than Pounds Sterling, the liability has been designated as a net investment hedge. Any change in the value of the liability resulting from changes in exchange rates is recognised directly in equity.

Provisions

Other recent accounting developments

Standards, amendments and interpretations effective in 2010 or issued and early adopted:

In preparing the Group financial statements for the current year, the Group has adopted the following new and amended standards and interpretations which have no impact on the results or net assets of the Group (unless otherwise stated):

Amendment to IAS 23 'Borrowing Costs', effective for annual periods beginning on or after 1 January 2009. The standard has been revised to require capitalisation of borrowing costs when such costs relate to a qualifying asset.
Amendment to IAS 32 'Financial Instruments: Presentation' and IAS 1 'Presentation of Financial Statements'– Puttable Instruments and Instruments with Obligations Arising on Liquidation, effective for annual periods beginning on or after 1 January 2009.
Amendment to IAS 32 'Financial Instruments: Presentation' Presentation on Classification of Rights Issues, effective for annual periods beginning on or after 1 January 2009.
Amendments to IFRS 1 'First-time Adoption of IFRSs' and IAS 27 'Consolidated and Separate Financial Statements' – Cost of an Investment of a Subsidiary, Jointly Controlled Entity or Associate, effective for annual reporting periods beginning on or after 1 January 2009.
IFRIC 9 'Reassessment of embedded derivatives' and IAS 39 'Financial Instruments: Recognition and Measurement – Embedded Derivatives (amendments)' effective for annual periods beginning on or after 1 July 2008.
IFRIC 14 'The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction', effective for annual periods beginning on or after 1 January 2008.
IFRIC 15 'Agreements for the Construction of Real Estate', effective for annual periods beginning on or after 1 January 2009.
IFRIC 16 'Hedges of a Net Investment in a Foreign Operation', effective for annual periods beginning on or after 1 October 2008.

Standards, amendments and interpretations not yet effective and under review as to their impact on the Group:

Amendments to IFRS 2 'Share-Based Payment' Group Cash-Settled Transactions, effective for annual periods beginning on or after 1 January 2010. In addition to incorporating IFRIC 8 'Scope of IFRS 2', and IFRIC 11 ' IFRS 2 – Group and treasury share transactions', the amendments expand on the guidance of IFRIC 11 to address the classification of group arrangements that were not covered by that interpretation. The new guidance is not expected to have a material impact on the Group's financial statements.
IAS 27 (revised) 'Consolidated and Separate Financial Statements', effective for annual periods beginning on or after 1 July 2009. The revised standard requires the effects of all transactions with noncontrolling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control of an entity is lost. Any remaining interest in the entity is remeasured to fair value, and a gain or loss is recognised in the Income Statement. The Group will apply IAS 27 (revised) prospectively to transactions with noncontrolling interests from 28 February 2010.
IFRS 3 (revised) 'Business Combinations', effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. The revised standard continues to apply the acquisition method to business combinations, with some significant changes, including: all payments to purchase a business are to be recorded at fair value at the acquisition date, with the contingent payments that are classified as debt subsequently remeasured through the Group Income Statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the noncontrolling interest's proportionate share of the acquirer's net assets. All acquisition-related costs should be expensed. The Group will apply IFRS 3 (revised) prospectively to all business combinations from 28 February 2010.
Amendment to IAS 39 'Financial Instruments: Recognition and Measurement' – Eligible Hedged Items, effective for annual periods beginning on or after 1 July 2009. The amendment provides clarification on how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations.
IFRS 9 'Financial Instruments', effective for annual periods beginning on or after 1 January 2013. This is the first part of a new standard on classification and measurement of financial assets that will replace IAS 39.
Amendment to IAS 24 'Related Party Disclosures', effective for annual periods beginning on or after 1 January 2011.
IFRIC 17 'Distributions of Non-Cash Assets to Owners', effective for annual periods beginning on or after 1 July 2009.
IFRIC 18 'Transfers of Assets from Customers', effective for transfers of assets from customers received on or after 1 July 2009.
IFRIC 19 'Extinguishing Financial Liabilities with Equity Instruments', effective for annual periods beginning on or after 1 July 2010.

The Group continually reviews amendments to the standards made under the IASB's annual improvements project.

Use of non-GAAP profit measures – underlying profit before tax

The adjustments made to reported profit before tax are:

• IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements – Under IAS 32 and IAS 39, the Group applies hedge accounting to its various hedge relationships when allowed under the rules of IAS 39 and when practical to do so. Sometimes the Group is unable to apply hedge accounting to the arrangements but continues to enter into these arrangements as they provide certainty or active management of the exchange rates and interest rates applicable to the Group. The Group believes these arrangements remain effective and economically and commercially viable hedges despite the inability to apply hedge accounting.

Where hedge accounting is not applied to certain hedging arrangements, the reported results reflect the movement in fair value of related derivatives due to changes in foreign exchange and interest rates. In addition, at each period end, any gain or loss accruing on open contracts is recognised in the Group Income Statement for the period, regardless of the expected outcome of the hedging contract on termination. This may mean that the Group Income Statement charge is highly volatile, whilst the resulting cash flows may not be as volatile. The underlying profit measure removes this volatility to help better identify underlying business performance. During 2010 there was no impact (2009 – £10m) of the IAS 32 and IAS 39 charge arose in the share of post-tax profit of joint ventures and associates, with the remainder in finance income/costs.

IAS 19 Income Statement charge for pensions Under IAS 19 'Employee Benefits', the cost of providing pension benefits in the future is discounted to a present value at the corporate bond yield rates applicable on the last day of the previous financial year. Corporate bond yield rates vary over time which in turn creates volatility in the Group Income Statement and Group Balance Sheet. IAS 19 also increases the charge for young pension schemes, such as Tesco's, by requiring the use of rates which do not take into account the future expected returns on the assets held in the pension scheme which will fund pension liabilities as they fall due. The sum of these two effects can make the IAS 19 charge disproportionately higher and more volatile than the cash contributions the Group is required to make in order to fund all future liabilities. Therefore, within underlying profit we have included the 'normal' cash contributions for pensions but excluded the volatile element of IAS 19 to represent what the Group believes to be a fairer measure of the cost of providing postemployment benefits.
IAS 17 'Leases' impact of annual uplifts in rent and rent-free periods – The amount charged to the Group Income Statement in respect of operating lease costs and incentives is expected to increase significantly as the Group expands its international business. The leases have been structured in a way to increase annual lease costs as the businesses expand. IAS 17 'Leases' requires the total cost of a lease to be recognised on a straight-line basis over the term of the lease, irrespective of the actual timing of the cost. The impact of this treatment in 2010 was a charge of £41m (2009 – £27m) to the Group Income Statement after deducting the impact of the straight-line treatment recognised as rental income within share of post-tax profits of joint ventures and associates.
IFRS 3 Amortisation charge from intangible assets arising on acquisition – Under IFRS 3 'Business Combinations', intangible assets are separately identified and valued. The intangible assets are required to be amortised on a straight-line basis over their useful economic lives and as such is a non-cash charge that does not reflect the underlying performance of the business acquired.
IFRIC 13 'Customer Loyalty Programmes' This new interpretation requires the fair value of customer loyalty awards to be measured as a separate component of a sales transaction. The underlying profit measure removes this fair value allocation to present underlying business performance, and to reflect the performance of the operating segments as measured by management.
Exceptional items Due to their significance and special nature, certain other items which do not reflect the Group's underlying performance have been excluded from underlying profit. These gains or losses can have a significant impact on both absolute profit and profit trends; consequently, they are excluded from the underlying profit of the Group. For the year ended 27 February 2010, exceptional items are as follows:
IAS 36 Impairment of goodwill arising on acquisitions the carrying value of goodwill relating to Japan was not fully recoverable, resulting in an impairment charge of £131m (2009 – £nil), and as such is a non-cash charge that does not reflect the underlying performance of the business. The recoverable amount for Japan was based on value in use, calculated from cash flow projections for five years using data from the Group's latest internal forecasts, the results of which are reviewed by the Board.
Restructuring costs These relate to certain costs associated with the Group's restructuring activities. For the year ended 27 February 2010, the Group incurred £33m (2009 – £nil), relating to restructuring activities.

There were no exceptional items in 2009.

Notes to the Group financial statements continued

Note 2 Segmental reporting

IFRS 8 requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision Maker ('CODM'). The CODM has been determined to be the Executive Committee of the Board of Directors as it is primarily responsible for the allocation of resources to segments and the assessment of performance of the segments. Previously, segments were determined and presented in accordance with IAS 14 'Segment Reporting'.

Segmental trading profit is an adjusted measure of operating profit, which measures the performance of each segment before exceptional items (goodwill impairment and restructuring charges), profit arising on property-related items, impact on leases of annual uplifts in rent and rent-free periods, amortisation charges from intangible assets arising on acquisition, adjustments to fair value of customer loyalty awards and replaces the IAS 19 pension charge with the 'normal' cash contributions for pensions.

On the adoption of IFRS 8, the Group revised its operating and reporting segments. The Group's operating segments were previously defined geographically – UK, Rest of Europe, Asia and US. The Group's operations (retail and retailing services) are managed by geography, with Tesco Bank as a separate reporting segment because of its different regulatory environment. Accordingly, the segments under IFRS 8 are UK, Rest of Europe (ROE comprises Republic of Ireland, Hungary, Poland, the Czech Republic, Slovakia and Turkey), Asia (comprising Thailand, South Korea, Malaysia, China, Japan and India), US and Tesco Bank.

Comparative information has been restated to reflect these new segments.

Segment assets include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated is comprised mainly of derivative receivables, interest-bearing loan receivables and taxation-related assets.

Inter-segment turnover between the operating segments is not material.

The segment results for the year ended 27 February 2010, for the year ended 28 February 2009 and the reconciliation of the segment measures to the respective statutory items included in the consolidated financial information are as follows:

Year ended 27 February 2010At constant exchange rates	UK£m	ROE£m	Asia£m	US£m	TescoBank£m	Total atconstantexchange£m	Foreignexchange£m	Totalat actualexchange£m
Continuing operations
Sales inc. VAT (excluding IFRIC 13)	42,254	9,979	8,737	324	860	62,154	383	62,537
Revenue (excluding IFRIC 13)	39,104	8,704	8,148	319	860	57,135	367	57,502
Effect of IFRIC 13	(546)	(19)	(25)	–	–	(590)	(2)	(592)
Revenue	38,558	8,685	8,123	319	860	56,545	365	56,910
Trading profit/(loss)	2,413	466	422	(151)	250	3,400	12	3,412
Trading margin*	6.2%	5.4%	5.2%	(47.3%)	29.1%	5.9%	–	5.9%
Year ended 27 February 2010At actual exchange rates	UK£m	ROE£m	Asia£m	US£m	TescoBank£m			Totalat actualexchange£m
Continuing operations
Sales inc. VAT (excluding IFRIC 13)	42,254	9,997	9,072	354	860			62,537
Revenue (excluding IFRIC 13)	39,104	8,724	8,465	349	860			57,502
Effect of IFRIC 13	(546)	(20)	(26)	–	–			(592)
Revenue	38,558	8,704	8,439	349	860			56,910
Trading profit/(loss)	2,413	474	440	(165)	250			3,412
Trading margin*	6.2%	5.4%	5.2%	(47.3%)	29.1%			5.9%
Year ended 28 February 2009At constant exchange rates	UK£m	ROE£m	Asia£m	US£m	TescoBank£m	Total atconstantexchange£m	Foreignexchange£m	Totalat actualexchange£m
Continuing operations
Sales inc. VAT (excluding IFRIC 13)	41,357	8,373	7,020	181	163	57,094	2,332	59,426
Revenue (excluding IFRIC 13)	38,028	7,335	6,552	179	163	52,257	2,070	54,327
Effect of IFRIC 13	(378)	(26)	(18)	–	–	(422)	(7)	(429)
Revenue	37,650	7,309	6,534	179	163	51,835	2,063	53,898
Trading profit/(loss)	2,309	411	345	(123)	68	3,010	76	3,086
Trading margin*	6.1%	5.6%	5.3%	(68.7%)	41.7%	5.8%		5.7%

* Trading margin is based on revenue excluding IFRIC 13.

Note 2 Segmental reporting continued

Year ended 28 February 2009At actual exchange rates	UK£m	ROE£m	Asia£m	US£m	TescoBank£m	Totalat actualexchange£m
Continuing operations
Sales inc. VAT (excluding IFRIC 13)	41,357	10,120	7,578	208	163	59,426
Revenue (excluding IFRIC 13)	38,028	8,862	7,068	206	163	54,327
Effect of IFRIC 13	(378)	(31)	(20)	–	–	(429)
Revenue	37,650	8,831	7,048	206	163	53,898
Trading profit/(loss)	2,309	496	355	(142)	68	3,086
Trading margin*	6.1%	5.6%	5.0%	(68.9%)	41.7%	5.7%

* Trading margin is based on revenue excluding IFRIC 13.

Reconciliation of trading profit to profit before tax

						2010	2009Restated
						£m	£m
Trading profit for reportable segments						3,412	3,086
Adjustments for:
Profit arising on property-related items						377	236
IAS 19 Non-cash Group Income Statement charge for pensions						24	(52)
IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods						(51)	(36)
IFRS 3 'Business Combinations' – amortisation charge from intangible assets arising on acquisition						(127)	(32)
IFRIC 13 'Customer Loyalty Programmes' – fair value of awards						(14)	(33)
Exceptional items:
IAS 36 Impairment of goodwill arising on acquisitions						(131)	–
Restructuring costs						(33)	–
Operating profit						3,457	3,169
Share of post-tax profit from joint ventures and associates						33	110
Finance income						265	116
Finance costs						(579)	(478)
Profit before tax						3,176	2,917
Taxation						(840)	(779)
Profit for the year						2,336	2,138
Segment assets
					Tesco	Other/	Totalat actual
At 27 February 2010	UK£m	ROE£m	Asia£m	US£m	Bank£m	unallocated£m	exchange£m

At 27 February 2010	£m	£m	£m	£m	£m	£m	£m
Total segment non-current assets	14,741	6,588	7,115	790	3,738	1,286	34,258
Total segment non-current assets includes:
Investments in joint ventures and associates	55	–	95	–	2	–	152
At 28 February 2009	UK£m	ROE£m	Asia£m	US£m	TescoBank£m	Other/unallocated£m	Totalat actualexchange£m
Total segment non-current assets	15,441	5,748	5,883	721	2,748	1,467	32,008
Restatement of acquisitions throughbusiness combinations	–	–	14	–	63	–	77
Total segment non-current assets – restated	15,441	5,748	5,897	721	2,811	1,467	32,085
Total segment non-current assets includes:
Investments in joint ventures and associates	49	–	13	–	–	–	62

Financial statements

Notes to the Group financial statements continued

Note 2 Segmental reporting continued

Other segment information
Year ended 27 February 2010	UK£m	ROE£m	Asia£m	US£m	TescoBank£m	Totalat actualexchange£m
Capital expenditure (including acquisitions through business combinations):
Property, plant and equipment	1,485	518	736	141	44	2,924
Investment property	–	8	8	–	–	16
Goodwill and other intangible assets	124	21	91	–	25	261
Depreciation:
Property, plant and equipment	(570)	(260)	(226)	(29)	(6)	(1,091)
Investment property	–	(8)	(8)	–	–	(16)
Amortisation of intangible assets	(116)	(20)	(14)	–	(127)	(277)
Goodwill impairment losses recognised in the Group Income Statement	–	–	(131)	–	–	(131)
Impairment losses recognised in the Group Income Statement	(27)	(18)	(6)	–	–	(51)
Reversal of prior period impairment losses through theGroup Income Statement	27	40	10	–	–	77
Other segment informationYear ended 28 February 2009 – restated	UK£m	ROE£m	Asia£m	US£m	TescoBank£m	Totalat actualexchange£m
Capital expenditure (including acquisitions through business combinations):
Property, plant and equipment	2,392	852	1,404	305	25	4,978
Investment property	–	48	152	–	–	200
Goodwill and other intangible assets	217	15	399	–	1,060	1,691
Depreciation:
Property, plant and equipment	(565)	(249)	(176)	(20)	(1)	(1,011)
Investment property	–	(9)	(16)	–	–	(25)
Amortisation of intangible assets	(99)	(16)	(6)	–	(32)	(153)
Goodwill impairment losses recognised in the Group Income Statement	–	–	–	–	–	–
Impairment losses recognised in the Group Income Statement	(21)	(41)	(4)	–	–	(66)
Reversal of prior period impairment losses through theGroup Income Statement	21	50	17	–	–	88

Note 3 Income and expenses

From continuing operations	2010£m	2009£m
Profit before tax is stated after charging/(crediting) the following:
Profit arising on property-related items	(377)	(236)
Rental income, of which £351m (2009 – £304m) relates to investment properties	(461)	(349)
Direct operating expenses arising on rental earning investment properties	103	91
Costs of inventories recognised as an expense	42,504	40,779
Stock losses	1,000	870
Depreciation of property, plant and equipment and investment property	1,107	1,036
Net reversal of impairment of property, plant and equipment and impairment of investment property	(26)	(22)
Amortisation of internally-generated development intangible assets	103	88
Amortisation of other intangibles	174	65
Operating lease expenses†	927	738

† Operating lease expenses include £83m (2009 – £81m) for hire of plant and machinery.

Note 3 Income and expenses continued

During the year, the Group (including its overseas subsidiaries) obtained the following services from the Group's auditor, PricewaterhouseCoopers LLP, and network firms:

	2010£m	2009£m
Audit services
Fees payable to the Company's auditor for the audit of the Parent Company and Group financial statements	0.6	0.6
Non-audit services
Fees payable to the Company's auditor and network firms for other services:
The audit of the accounts of the Company's subsidiaries pursuant to legislation	3.5	3.1
Other services pursuant to such legislation	0.1	0.1
Other services relating to taxation	0.4	0.8
Other services relating to corporate finance transactions	0.1	1.3
All other services	0.6	0.6
Total auditor remuneration	5.3	6.5

In addition to the amounts shown above, the auditors received fees of £0.1m (2009 – £0.1m) for the audit of the main Group pension scheme.

A description of the work of the Audit Committee is set out in the Corporate Governance Report on page 46 and includes an explanation of how objectivity and independence is safeguarded when non-audit services are provided by PricewaterhouseCoopers LLP.

Note 4 Employment costs, including Directors' remuneration

	2010	2009Restated
	£m	£m
Wages and salaries	5,057	4,707
Social security costs	435	410
Post-employment benefits (note 28)	403	439
Share-based payments expense (note 27)	300	246
	6,195	5,802

The average number of employees by operating segment during the year was:

		Average numberof employees		Average number offull-time equivalents
	2010	Restated2009	2010	Restated2009
UK	287,266	286,092	196,604	194,135
Rest of Europe	86,642	86,760	77,847	78,914
Asia	94,536	92,773	94,248	88,099
US	3,246	2,583	3,246	2,583
Tesco Bank	404	300	393	284
Total	472,094	468,508	372,338	364,015

* The comparatives have been restated to reflect Tesco Bank as a separate segment. In 2009, Tesco Bank employees were included in the UK reporting segment.

Notes to the Group financial statements continued

Note 5 Finance income and costs

	2010£m	2009£m
Finance income
Bank interest receivable and similar income on cash and cash equivalents	114	91
Net pension finance income (note 28)	–	25
Total finance income (on historical cost basis)	114	116
IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements	151	–
Total finance income	265	116
Finance costs
Interest payable on short-term bank loans and overdrafts repayable within five years	(135)	(152)
Finance charges payable under finance leases and hire purchase contracts	(9)	(13)
6% 125m GBP MTN 2008	–	(2)
5.25% 500m EUR MTN 2008	–	(4)
5.125% 192m GBP MTN 2009	(8)	(10)
6.625% 150m GBP MTN 2010	(10)	(10)
4.75% 750m EUR MTN 2010	(25)	(26)
3.875% 500m EUR MTN 2011	(13)	(14)
5.625% 1,500m EUR MTN 2012	(74)	(35)
5% 600m GBP MTN 2014	(30)	(1)
5.125% 600m EUR MTN 2015	(27)	(1)
4% RPI GBP MTN 2016(a)	(12)	(23)
5.875% 1,500m EUR MTN 2016	(72)	(33)
5.5% 850m USD Bond 2017	(23)	(23)
5.5% 350m GBP MTN 2019	(19)	(20)
6.125% 900m GBP MTN 2022	(55)	(1)
5% 515m GBP MTN 2023	(26)	(21)
3.322% LPI GBP MTN 2025(b)	(11)	(20)
6% 200m GBP MTN 2029	(12)	(12)
5.5% 200m GBP MTN 2033	(11)	(11)
1.982% RPI GBP MTN 2036(c)	(5)	(14)
6.15% 1,150m USD Bond 2037	(34)	(35)
5% 300m GBP MTN 2042	(15)	(15)
5.125% 600m EUR MTN 2047	(21)	(21)
5.2% 500m GBP MTN 2057	(26)	(26)
Other MTNs	(13)	(9)
Capitalised interest (note 11)	155	152
Total finance costs (on historical cost basis)	(531)	(400)
Net pension finance cost (note 28)	(48)	–
IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements	–	(78)
Total finance costs	(579)	(478)

(a) Interest payable on the 4% RPI GBP MTN 2016 includes £1m (2009 – £13m) of Retail Price Index (RPI) related amortisation. (b) Interest payable on the 3.322% LPI GBP MTN 2025 includes £2m (2009 – £11m) of RPI related amortisation. (c) Interest payable on the 1.982% RPI GBP MTN 2036 includes £1m (2009 – £10m) of RPI related amortisation.

Finance income of £20m (2009 – finance costs of £30m) resulted from hedge ineffectiveness.

Note 6 Taxation

Recognised in the Group Income Statement	2010	2009
	£m	Restated£m
Current tax expense
UK corporation tax	566	673
Foreign tax	128	88
Adjustments in respect of prior years	(91)	(164)
	603	597
Deferred tax expense
Origination and reversal of temporary differences	110	110
Adjustments in respect of prior years	124	97
Change in tax rate	3	(25)
	237	182
Total income tax expense	840	779

UK corporation tax is calculated at 28.0% (2009 – 28.2%) of the estimated assessable profit for the year. Taxation in other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

Reconciliation of effective tax charge 2010 2009

		Restated
	£m	£m
Profit before tax	3,176	2,917
Effective tax charge at 28.0% (2009 – 28.2%)	(889)	(823)
Effect of:
Non-deductible expenses	(13)	(190)
Differences in overseas taxation rates	93	111
Adjustments in respect of prior years	(33)	67
Share of results of joint ventures and associates	5	31
Change in tax rate	(3)	25
Total income tax charge for the year	(840)	(779)
Effective tax rate	26.4%	26.7%

Tax on items credited directly to equity

	2010£m	2009£m
Current tax credit on:
Share-based payments	15	46
Deferred tax credit on:
Share-based payments	3	14
Total tax on items credited to equity	18	60

Tax relating to components of other comprehensive income

	2010£m	2009£m
Current tax (charge)/credit on:
Foreign exchange movements	(33)	199
Deferred tax credit on:
Pensions	87	176
Total tax on items credited to other comprehensive income	54	375

Notes to the Group financial statements continued

Note 6 Taxation continued

Deferred tax

The following are the major deferred tax assets/(liabilities) recognised by the Group and movements thereon during the current and prior year:

	Acceleratedtaxdepreciation£m	Retirementbenefitobligation£m	Share-basedpayments£m	Short-termtimingdifferences£m	Tax losses£m	IAS 32 andIAS 39£m	Otherpre/posttax temporarydifferences£m	Total£m
At 23 February 2008 (restated)	(1,068)	233	76	36	12	13	11	(687)
(Charge)/credit to theGroup Income Statement	(194)	7	(46)	70	1	(8)	(12)	(182)
Credit directly to equity	–	–	14	–	–	–	–	14
Credit to other comprehensive income	–	176	–	–	–	–	–	176
Acquisition of subsidiaries	12	–	–	(14)	–	42	–	40
Foreign exchange translation	3	1	–	(2)	3	–	7	12
At 28 February 2009 (restated)	(1,247)	417	44	90	16	47	6	(627)
(Charge)/credit to theGroup Income Statement	(257)	7	9	(7)	21	(11)	1	(237)
Credit directly to equity	–	–	3	–	–	–	–	3
Credit to other comprehensive income	–	87	–	–	–	–	–	87
Acquisition of subsidiaries	–	–	–	–	2	–	–	2
Foreign exchange and other movements	8	–	–	8	2	–	(3)	15
At 27 February 2010	(1,496)	511	56	91	41	36	4	(757)

Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes:

	2010	2009Restated
	£m	£m
Deferred tax assets	38	49
Deferred tax liabilities	(795)	(676)
	(757)	(627)

The impact of adopting IFRIC 13 on the 2009 opening balance sheet was an £11m reduction in deferred tax liabilities.

No deferred tax is recognised on the unremitted earnings of overseas subsidiaries and joint ventures, because the earnings are continually reinvested by the Group and no tax is expected to be payable on them in the foreseeable future. The temporary difference unrecognised at the year end amounted to £2,766m (2009 – £1,726m). Furthermore the introduction of a dividend exemption in the UK tax legislation with effect from 1 July 2009 means that earnings can be remitted from certain subsidiary undertakings where no tax will be payable on repatriation.

Unrecognised deferred tax assets

	2010£m	2009£m
Deductible temporary differences	1	12
Tax losses	286	192
	287	204

As at 27 February 2010, the Group has unused trading tax losses of £1,019m (2009 – £744m) available for offset against future profits. A deferred tax asset has been recognised in respect of £142m (2009 – £58m) of such losses. No deferred tax asset has been recognised in respect of the remaining £877m (2009 – £686m) due to the unpredictability of future profit streams. Included in unrecognised tax losses are losses of £297m (2009 – £32m in 2013) that will expire in 2014 and £550m (2009 – £647m between 2014 and 2029) that will expire between 2015 and 2030. Other losses will be carried forward indefinitely.

In addition, the Group has UK capital losses of £342m (2009 – £310m) in respect of which no deferred tax asset has been recognised.

Note 7 Non-current assets classified as held for sale

	2010£m	2009£m
Non-current assets classified as held for sale	373	398

The non-current assets classified as held for sale consist mainly of properties in the United Kingdom due to be sold within one year.

Note 8 Dividends

		52 weeks ended27 February 2010		53 weeks ended28 February 2009
	pence/share	£m	pence/share	£m
Amounts recognised as distributions to owners in the year:
Final dividend for the prior financial year	8.39	660	7.70	603
Interim dividend for the current financial year	3.89	308	3.57	280
	12.28	968	11.27	883
Proposed final dividend for the current financial year	9.16	731	8.39	662

The proposed final dividend was approved by the Board of Directors on 19 April 2010 and is subject to the approval of shareholders at the Annual General Meeting. The proposed dividend has not been included as a liability as at 27 February 2010, in accordance with IAS 10 'Events After the Balance Sheet Date'. It will be paid on 9 July 2010 to shareholders who are on the register of members on 1 May 2010.

Note 9 Earnings per share and diluted earnings per share

Basic earnings per share amounts are calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares in issue during the year.

All operations are continuing for the years presented.

			52 weeks ended27 February 2010			53 weeks ended28 February 2009Restated
	Basic	Potentiallydilutiveshare options	Diluted	Basic	Potentiallydilutiveshare options	Diluted
Profit (£m)	2,327	–	2,327	2,133	–	2,133
Weighted average number of shares (millions)	7,933	39	7,972	7,859	53	7,912
Earnings per share (pence)	29.33	(0.14)	29.19	27.14	(0.18)	26.96

Reconciliation of non-GAAP underlying diluted earnings per share

		52 weeks ended27 February 2010		53 weeks ended28 February 2009Restated
	£m	pence/share	£m	pence/share
Profit	2,327	29.19	2,133	26.96
Adjustments for:
IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements	(151)	(1.90)	88	1.11
Total IAS 19 Non-cash Group Income Statement charge for pensions	24	0.30	27	0.34
IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods	41	0.52	27	0.34
IFRS 3 Amortisation charge from intangible assets arising on acquisition	127	1.59	32	0.41
IFRIC 13 'Customer Loyalty Programmes' – fair value of awards	14	0.18	33	0.41
Exceptional items:
IAS 36 Impairment of goodwill arising on acquisitions	131	1.64	–	–
Restructuring costs	33	0.41	–	–
Tax effect of adjustments at the effective rate of tax (2010 – 25.4%*; 2009 – 26.7%)	(22)	(0.27)	(56)	(0.70)
Underlying earnings from operations	2,524	31.66	2,284	28.87

* The effective tax rate of 25.4% excludes the adjustment for goodwill impairment.

Notes to the Group financial statements continued

Note 10 Goodwill and other intangible assets

	Internallygenerateddevelopmentcosts£m	Pharmacyandsoftwarelicences£m	Otherintangibleassets£m	Goodwill£m	Total£m
Cost
At 28 February 2009	879	310	318	3,283	4,790
Restatement of acquisitions through business combinations	–	–	–	49	49
At 28 February 2009 (restated)	879	310	318	3,332	4,839
Foreign currency translation	9	11	14	136	170
Additions	111	50	2	98	261
Reclassification across categories	136	(1)	1	1	137
Disposals	(2)	(2)	–	(1)	(5)
At 27 February 2010	1,133	368	335	3,566	5,402
Accumulated amortisation and impairment losses
At 28 February 2009	426	197	42	98	763
Foreign currency translation	3	6	3	1	13
Amortisation for the year	103	43	131	–	277
Reclassification across categories	42	(3)	4	(1)	42
Impairment charge for the year	–	–	–	131	131
Disposals	–	(1)	–	–	(1)
At 27 February 2010	574	242	180	229	1,225
Net carrying value
At 27 February 2010	559	126	155	3,337	4,177
At 28 February 2009 (restated)	453	113	276	3,234	4,076
Cost
At 23 February 2008	691	278	48	1,927	2,944
Foreign currency translation	6	7	(4)	205	214
Additions	192	26	2	–	220
Acquisitions through business combinations – restated	–	–	270	1,201	1,471
Reclassification across categories	(2)	–	2	–	–
Disposals	(8)	(1)	–	(1)	(10)
At 28 February 2009 (restated)	879	310	318	3,332	4,839
Accumulated amortisation and impairment losses
At 23 February 2008	340	163	7	98	608
Foreign currency translation	–	4	–	–	4
Amortisation for the year	88	31	34	–	153
Reclassification across categories	(1)	–	1	–	–
Disposals	(1)	(1)	–	–	(2)
At 28 February 2009 (restated)	426	197	42	98	763
Net carrying value
At 28 February 2009 (restated)	453	113	276	3,234	4,076
At 23 February 2008	351	115	41	1,829	2,336

There are no intangible assets, other than goodwill, with indefinite useful lives.

Note 10 Goodwill and other intangible assets continued

Impairment of goodwill

Goodwill arising on business combinations is not amortised but is reviewed for impairment on an annual basis or more frequently if there are indications that goodwill may be impaired. Goodwill acquired in a business combination is allocated to groups of cash-generating units according to the level at which management monitor that goodwill.

Recoverable amounts for cash-generating units are based on the higher of value in use and fair value less costs to sell. In 2010, recoverable amounts are based on value in use. Value in use is calculated from cash flow projections for generally five years using data from the Group's latest internal forecasts, the results of which are reviewed by the Board. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimate discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. Changes in selling prices and direct costs are based on past experience and expectations of future changes in the market. Given the current economic climate, a sensitivity analysis has been performed in assessing the recoverable amounts of goodwill.

The carrying amount for Japan has been reduced to its recoverable amount through the recognition of an impairment loss of £131m against goodwill. This has been included in cost of sales in the Group Income Statement. The key assumptions for Japan include a long-term growth rate of 1.1% (2009 – 1.5%) and a pre-tax discount rate of 6.1% (2009 – 7.3%).

The forecasts are extrapolated beyond five years based on estimated long-term average growth rates of generally 1% to 4% (2009 – 2% to 10%).

In the case of Poland, it is reasonably possible that a change in key assumptions would cause the goodwill to exceed its value in use. With headroom of £46m (2009 – £84m) and assuming a 10.6% pre-tax discount rate (2009 – 11.3%), a 0.3% (2009 – 0.4%) increase in the discount rate would cause goodwill to exceed its value in use.

The pre-tax discount rates used to calculate value in use range from 6%-14% (2009 – 7% to 24%). On a post-tax basis, the discount rates ranged from 4% to 13% (2009 – 5% to 19%). These discount rates are derived from the Group's post-tax weighted average cost of capital as adjusted for the specific risks relating to each geographical region.

In February 2010 and 2009 impairment reviews were performed by comparing the carrying value of goodwill with the recoverable amount of the cashgenerating units to which goodwill has been allocated.

The components of goodwill are as follows:

	2010	2009
	£m	Restated£m
UK	645	616
Tesco Bank	802	802
Thailand	157	153
South Korea	489	392
Japan	55	196
China	594	540
Malaysia	77	76
Poland	424	354
Czech Republic	35	47
Turkey	54	53
Other	5	5
	3,337	3,234

Notes to the Group financial statements continued

Note 11 Property, plant and equipment

	Land andbuildings	Other(a)	Total
	£m	£m	£m
Cost
At 28 February 2009	22,349	7,495	29,844
Foreign currency translation	793	234	1,027
Additions(b)	2,189	735	2,924
Transfers	(279)	71	(208)
Classified as held for sale	2	4	6
Disposals	(1,669)	(141)	(1,810)
At 27 February 2010	23,385	8,398	31,783
Accumulated depreciation and impairment losses
At 28 February 2009	2,540	4,152	6,692
Foreign currency translation	80	121	201
Charge for the year	354	737	1,091
Transfers	(34)	(48)	(82)
Classified as held for sale	(39)	1	(38)
Disposals	(178)	(83)	(261)
Impairment losses	51	–	51
Reversal of impairment losses	(74)	–	(74)
At 27 February 2010	2,700	4,880	7,580
Net carrying value(c)(d)(e)
At 27 February 2010	20,685	3,518	24,203
At 28 February 2009	19,809	3,343	23,152
Capital work in progress included above(f)
At 27 February 2010	1,652	193	1,845
(a) Other assets consist of plant, equipment, fixtures and fittings and motor vehicles.(b) Includes £155m (2009 – £152m) in respect of interest capitalised, principally relatingto land and building assets. The capitalisation rate used to determine the amount offinance costs capitalised during the year was 5.1% (2009 – 5.1%). Interest capitalisedis deducted in determining taxable profit in the year in which it is incurred.(c) Net carrying value includes:

(i) Capitalised interest at 27 February 2010 of £805m (2009 – £910m). (ii) Assets held under finance leases which are analysed below:

		2010		2009
	Land andbuildings£m	Other(a)£m	Land andbuildings£m	Other(a)£m
Cost	139	582	121	578
Accumulated depreciationand impairment losses	(36)	(430)	(22)	(390)
Net carrying value	103	152	99	188

These assets are pledged as security for the finance lease liabilities.

(d) The net carrying value of land and buildings comprises:

	2010£m	2009£m
Freehold	17,855	17,332
Long leasehold – 50 years or more	971	1,450
Short leasehold – less than 50 years	1,859	1,027
Net carrying value	20,685	19,809

(e) Carrying value of land and buildings includes £3m (2009 – £4m) relating to the

prepayment of lease premiums. (f) Capital work in progress does not include land.

Note 11 Property, plant and equipment continued

	Land andbuildings£m	Other(a)£m	Total£m
Cost
At 23 February 2008	19,210	6,340	25,550
Foreign currency translation	434	191	625
Additions(b)	3,345	1,013	4,358
Acquisitions through business combinations	586	34	620
Reclassification across categories	(305)	45	(260)
Classified as held for sale	(74)	(8)	(82)
Disposals	(847)	(120)	(967)
At 28 February 2009	22,349	7,495	29,844
Accumulated depreciation and impairment losses
At 23 February 2008	2,280	3,483	5,763
Foreign currency translation	55	103	158
Charge for the year	352	659	1,011
Reclassification across categories	(5)	–	(5)
Classified as held for sale	18	(3)	15
Disposals	(128)	(90)	(218)
Impairment losses	56	–	56
Reversal of impairment losses	(88)	–	(88)
At 28 February 2009	2,540	4,152	6,692
Net carrying value(c)(d)(e)
At 28 February 2009	19,809	3,343	23,152
At 23 February 2008	16,930	2,857	19,787
Capital work in progress included above(f)
At 28 February 2009	1,375	159	1,534

Impairment of property, plant and equipment

Recoverable amounts for cash-generating units are mainly based on value in use, which is generally calculated from cash flow projections for five to twenty years using data from the Group's latest internal forecasts, the results of which are reviewed by the Board. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimate discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. Changes in selling prices and direct costs are based on past experience and expectations of future changes in the market.

The forecasts are extrapolated beyond five years based on estimated long-term growth rates of generally 1% to 4% (2009 – 2% to 10%).

The pre-tax discount rates used to calculate value in use range from 6% to 14% (2009 – 7% to 24%) depending on the specific conditions in which each store operates. These discount rates are derived from the Group's post-tax weighted average cost of capital.

Notes to the Group financial statements continued

Note 11 Property, plant and equipment continued

The following amounts have been (charged)/credited to cost of sales in the Group Income Statement:

	2010£m	2009£m
Impairment losses
UK	(27)	(21)
Rest of Europe	(18)	(31)
Asia	(6)	(4)
	(51)	(56)
Reversal of impairment losses
UK	27	21
Rest of Europe	37	50
Asia	10	17
	74	88
Net reversal of impairment losses	23	32

The reversal of previous impairment losses arose principally due to improvements in stores' performances over the last year which increased the net present value of future cash flows.

Note 12 Investment property

	2010£m	2009£m
Cost
At beginning of year	1,660	1,190
Foreign currency translation	172	24
Additions	16	114
Acquisitions through business combinations	–	86
Transfers	71	260
Classified as held for sale	–	(10)
Disposals	–	(4)
At end of year	1,919	1,660
Accumulated depreciation and impairment losses

121	78
14	3
16	25
40	5
–	10
(3)	–
188	121
1,731	1,539

The net carrying value at 23 February 2008 was £1,112m.

Note 12 Investment property continued

The following amounts have been credited/(charged) to operating costs in the Group Income Statement:

	2010£m	2009£m
Impairment losses
Rest of Europe	–	(10)
Impairment losses	–	(10)
	2010£m	2009£m
Reversal of impairment losses
Rest of Europe	3	–
Reversal of impairment losses	3	–
Net reversal of impairment losses/(impairment charge)	3	(10)

The reversal of previous impairment losses arose principally due to improvements in the performance of malls over the last year, which increased the net present value of cash flows.

The estimated fair value of the Group's investment property is £2.8bn (2009 – £3.2bn). This fair value has been determined by applying an appropriate rental yield to the rentals earned by the investment property. A valuation has not been performed by an independent valuer.

Note 13 Group entities

Principal subsidiaries

The Group consolidates its subsidiary undertakings and its principal subsidiaries are:

		Share of issuedordinary share capital	Country of incorporationand principal country
	Business activity	and voting rights	of operation
Tesco Stores Limited	Retail	100%	England
One Stop Stores Limited(a)	Retail	100%	England
Tesco Ireland Limited	Retail	100%	Republic of Ireland
Tesco-Global Stores Privately Held Co. Limited	Retail	99%	Hungary
Tesco Polska Sp. z o.o.	Retail	100%	Poland
Tesco Stores Cˇ R a.s.	Retail	100%	Czech Republic
Tesco Stores S R a.s.	Retail	100%	Slovakia
Tesco Kipa Kitle Paza rlama Ticaret ve Gide Sanai A.S¸.(a)	Retail	93%	Turkey
Samsung Tesco Co. Limited	Retail	94%	South Korea
Homever Tesco Co. Limited	Retail	100%	South Korea
Ek-Chai Distribution System Co. Limited	Retail	86%(b)	Thailand
Tesco Stores Malaysia Sdn Bhd	Retail	70%	Malaysia
Tesco Japan Co. Limited	Retail	100%	Japan
Shanghai Kancheng Storage Co. Limited	Retail	100%	People's Republic of China
Dobbies Garden Centres PLC	Retail	100%	Scotland
Fresh & Easy Neighborhood Market Inc	Retail	100%	USA
Tesco Personal Finance Group Limited(a)
(trading as Tesco Bank)	Financial Services	100%	Scotland
Tesco Distribution Limited	Distribution	100%	England
Tesco Property Holdings Limited	Property	100%	England
Tesco International Sourcing Limited	Purchasing	100%	Hong Kong
dunnhumby Limited	Data Analysis	90%	England
ELH Insurance Limited (formerly Tesco Insurance Limited)	Self-insurance	100%	Guernsey
Valiant Insurance Company Limited	Self-insurance	100%	Republic of Ireland

(a) Held by the Parent Company (all other principal subsidiaries are held by an intermediate subsidiary).

(b) The Group has 86% of voting rights and 39% of issued ordinary share capital in Ek-Chai Distribution System Co. Limited.

The accounting period ends of the subsidiary undertakings consolidated in these financial statements are on or around 27 February 2010. A full list of the Group's subsidiary undertakings will be annexed to the next Annual Return filed at Companies House. There are no significant restrictions on the ability of subsidiary undertakings to transfer funds to the parent, other than those imposed by the Companies Act 2006.

Notes to the Group financial statements continued

Note 13 Group entities continued

Interests in joint ventures and associates

The Group uses the equity method of accounting for joint ventures and associates. The following table shows the aggregate movement in the Group's investment in joint ventures and associates:

	Joint ventures£m	Associates£m	Total£m
At 24 February 2008	295	10	305
Foreign currency translation	4	–	4
Share of profit of joint ventures and associates	106	4	110
Income received from joint ventures and associates	(68)	(1)	(69)
Transferred to amounts owed by subsidiary undertakings	(37)	–	(37)
Transferred to investment in subsidiary undertakings	(251)	–	(251)
At 28 February 2009	49	13	62
Additions	83	–	83
Foreign currency translation	9	–	9
Share of profit of joint ventures and associates	29	4	33
Income received from joint ventures and associates	(34)	(1)	(35)
At 27 February 2010	136	16	152

Transferred to investment in subsidiary undertakings

During the year ended 28 February 2009, the Group acquired the remaining 50% of the share capital of Tesco Personal Finance Group Limited (trading as Tesco Bank), previously a joint venture, making the company a wholly-owned subsidiary entity which has been consolidated within the Group results from the date of acquisition onwards.

Significant joint ventures

The Group's principal joint ventures are:

		Share of issued sharecapital, loan capital and	Country of incorporationand principal country
	Business activity	debt securities	of operation
Tesco Mobile Limited	Telecommunications	50%	England
Shopping Centres Limited(a)	Property Investment	50%	England
BLT Properties Limited(a)	Property Investment	50%	England
Tesco British Land Property Partnership	Property Investment	50%	England
Tesco Red Limited Partnership	Property Investment	50%	England
Tesco Aqua Limited Partnership	Property Investment	50%	England
Tesco Jade Limited Partnership	Property Investment	50%	England
Tesco Coral Limited Partnership	Property Investment	50%	England
Tesco Blue Limited Partnership	Property Investment	50%	England
Tesco Atrato Limited Partnership	Property Investment	50%	England
Fushun Jinxiu Real Estate Development Co Limited	Property Investment	50%	People's Republic of China
Anshan Real Estate Development Co Limited	Property Investment	50%	People's Republic of China
Tesco Qinhuangdo Property Limited	Property Investment	50%	People's Republic of China
Arena (Jersey) Management Limited	Property Investment	50%	Jersey
The Tesco Property Limited Partnership	Property Investment	50%	England
The Tesco Property (No. 2) Limited Partnership	Property Investment	50%	Jersey

(a) Held by the Parent Company (all other principal subsidiaries are held by an intermediate subsidiary).

The accounting period ends of the joint ventures consolidated in these financial statements range from 31 December 2009 to 28 February 2010. Accounting period end dates different from those of the Group arise for commercial reasons and depend upon the requirements of the joint venture partner as well as those of the Group.

Note 13 Group entities continued

The share of the assets, liabilities, revenue and profit of the joint ventures, which are included in the consolidated financial statements, are as follows:

	2010£m	2009£m
Non-current assets	2,216	1,637
Current assets	359	281
Current liabilities	(411)	(426)
Non-current liabilities	(2,041)	(1,458)
Goodwill	1	1
Cumulative unrecognised losses	12	14
	136	49
Revenue	355	549
Expenses	(326)	(443)
Profit for the year	29	106

The unrecognised share of losses made by joint ventures during the year ended 27 February 2010 was £3m (2009 – £7m).

Associates

The Group's principal associate is:

		Share of issued share capital,loan capital and debt	Country of incorporationand principal country
	Business activity	securities	of operation
Greenergy International Limited†	Fuel Supplier	21%	England

† Held by an intermediate subsidiary.

Although the Group only holds a 21.3% non-voting shareholding in Greenergy International Limited it is treated as an associate as the Board of Greenergy International Limited requires the consent of the Group on certain reserve matters as specified in the company's Articles of Association.

The share of the assets, liabilities, revenue and profit of the Group's associates, which are included in the consolidated financial statements, are as follows:

	2010£m	2009£m
Assets	156	163
Liabilities	(142)	(152)
Goodwill	2	2
	16	13
Revenue	473	540
Profit for the year	4	4

The accounting period ends of the associates consolidated in these financial statements range from 31 December 2009 to 31 January 2010. The accounting period end dates of the associates are different from those of the Group as they also depend upon the requirements of the parent companies of those entities.

There are no significant restrictions on the ability of associated undertakings to transfer funds to the parent, other than those imposed by the Companies Act 2006.

Note 14 Other investments

	2010£m	2009£m
Loan receivable	259	259
Available-for-sale financial assets	604	–
	863	259

The loan receivable comprises an interest-free subordinated loan made by Tesco Bank to Direct Line Group Limited. This loan has no interest receivable and no fixed repayment date.

No impairment charge was recognised on the loan during the year (2009 – £nil).

Included in available-for-sale financial assets is £224m, which is current.

Notes to the Group financial statements continued

Note 14 Other investments continued

The following table shows the aggregate movement in the Group's other investments during the year:

	2010£m	2009£m
At beginning of year	259	4
Additions	603	–
Acquisitions through business combinations	–	259
IAS 32 and IAS 39 'Financial Instruments' – Fair value remeasurements	1	(4)
At end of year	863	259

Note 15 Inventories

	2010£m	2009£m
Goods held for resale	2,726	2,656
Development properties	3	13
	2,729	2,669

Note 16 Trade and other receivables

	2010£m	2009Restated£m
Prepayments and accrued income	337	419
Other receivables	1,236	1,125
Amounts owed by joint ventures and associates (note 30)	315	276
	1,888	1,820

Included within trade and other receivables are the following amounts receivable after more than one year:

	2010£m	2009£m
Prepayments and accrued income	31	14
Other receivables	346	275
Amounts owed by joint ventures and associates (note 30)	309	262
	686	551

Trade and other receivables are generally non-interest bearing. Credit terms vary by country and the nature of the debt and can be from 7 to 60 days.

Trade receivables are recorded at amortised cost, reduced by estimated allowances for doubtful debts.

Provision for impairment of receivables

At 23 February 2008(29)Foreign currency translation(2)


Charge for the year(21)
Uncollectible amounts written off3
Recoveries of amounts previously written off5
At 28 February 2009(44)
Foreign currency translation(5)
Charge for the year(3)
Uncollectible amounts written off–
Recoveries of amounts previously written off5
At 27 February 2010(47)

Note 16 Trade and other receivables continued

As at 27 February 2010, trade and other receivables of £49m (2009 – £45m) were past due and impaired. The amount of the provision was £47m (2009 – £44m). The ageing analysis of these receivables is as follows:

	2010£m	2009£m
Up to three months past due	8	3
Three to six months past due	4	3
Over six months past due	37	39
	49	45

As at 27 February 2010, trade and other receivables of £115m (2009 – £97m) were past due but not impaired. The ageing analysis of these receivables is as follows:

	2010£m	2009£m
Up to three months past due	97	71
Three to six months past due	10	15
Over six months past due	8	11
	115	97

No receivables have been renegotiated in the current or prior year.

Note 17 Loans and advances to customers

Tesco Bank has loans and advances to customers.

	2010£m	2009£m
Current	2,268	1,918
Non-current	1,844	1,470
	4,112	3,388

The maturity of these loans and advances is as follows:

	2010£m	2009£m
Repayable on demand or at short notice	1	1
Within three months	2,370	2,021
Greater than three months but less than one year	70	38
Greater than one year but less than five years	1,504	1,061
After five years	481	517
	4,426	3,638
Provision for impairment of loans and advances	(314)	(250)
	4,112	3,388

Loans and advances include amounts subject to securitisation of £1,459m (2009 – £1,468m). During 2009 the Group entered into a securitisation transaction and issued debt securities which the Group subsequently purchased. The purpose of the transaction was to allow the Group to enter into the Special Liquidity Scheme whereby it would enter into a sale and repurchase agreement acquiring Treasury Bills issued by the UK Government and using the debt securities as security. As at 27 February 2010 the Group held £500m (2009 – £588m) in respect of this transaction. The Treasury Bills do not meet the recognition criteria of IAS 39 and are not recognised on the Group Balance Sheet.

Provision for impairment of loans and advances £m

(229)
(130)
109
(7)
7
(250)
(177)
119
(10)
4
(314)

* Tesco Personal Finance Group Limited (trading as Tesco Bank) was acquired on 19 December 2008.

Tesco PLC Annual Report and Financial Statements 2010 99

Notes to the Group financial statements continued

Note 17 Loans and advances to customers continued

At 27 February 2010, Tesco Bank's non-interest bearing loans were £373m (2009 – £291m). Loan impairment provisions of £314m (2009 – £250m) were held against these loans. During the year ended 27 February 2010, the gross income not recognised but which would have been recognised under the original terms of non-interest bearing loans was £29m (2009 – £25m).

At 27 February 2010, loans and advances to customers of £75m (2009 – £82m) were past due but not impaired. The ageing analysis of these loans and advances is as follows:

	2010£m	2009£m
Up to one month past due	55	58
One to three months past due	13	15
Over three months past due	7	9
	75	82

Note 18 Loans and advances to banks and other financial assets

Tesco Bank has loans and advances to banks and other financial assets with the following maturity:

	2010	2009Restated
	£m	£m
Within three months	144	1,509
Greater than three months but less than one year	–	3
Greater than one year but less than five years	–	29
	144	1,541

There are no loans and advances to banks and other financial assets which are past due and impaired.

Note 19 Cash and cash equivalents

	2010£m	2009£m
Cash at bank and in hand	2,062	2,112
Short-term deposits	757	1,397
	2,819	3,509

Cash of £1,314m (2009 – £1,233m) held on money market funds is classed as short-term investments.

Note 20 Trade and other payables

	2010	2009Restated
	£m	£m
Trade payables	5,084	4,748
Other taxation and social security	487	334
Other payables	2,014	2,054
Amounts payable to joint ventures and associates (note 30)	42	162
Accruals and deferred income	1,815	1,367
	9,442	8,665

Included in other payables are amounts of £160m (2009 – £68m) which are non-current.

The impact of adopting IFRIC 13 on the 2009 opening balance sheet was to increase other payables by £38m and accruals and deferred income by £2m. Overall trade and other payables increased to £7,359m.

Note 21 Borrowings

Current
	Par value	Maturityyear	2010£m	2009Restated£m
Bank loans and overdrafts	–	–	575	3,014
Loan from joint ventures (note 30)	–	–	23	20
5.125% MTN	£192m	2009	–	198
6.625% MTN	£150m	2010	158	–
4.75% MTN	€750m	2010	704	–
Other MTNs	–	–	24	192
Finance leases (note 35)	–	–	45	47
			1,529	3,471

Non-current

	Par value	Maturityyear	2010£m	2009£m
Finance leases (note 35)	–	–	164	196
6.625% MTN	£150m	2010	–	154
4.75% MTN	€750m	2010	–	689
3.875% MTN	€500m	2011	479	476
5.625% MTN	€1,500m	2012	1,375	1,362
LIBOR + 1.33% Bond – Tesco Bank	£225m	2012	224	225
5% MTN	£600m	2014	604	592
5.125% MTN	€600m	2015	539	522
4% RPI MTN(a)	£263m	2016	270	268
5.875% MTN	€1,500m	2016	1,520	1,488
5.5% USD Bond	$850m	2017	621	678
5.5% MTN	£350m	2019	351	351
6.125% MTN	£900m	2022	890	901
5% MTN	£515m	2023	520	515
3.322% LPI MTN(b)	£265m	2025	269	267
6% MTN	£200m	2029	212	216
5.5% MTN	£200m	2033	210	216
1.982% RPI MTN(c)	£221m	2036	222	221
6.15% USD Bond	$1,150m	2037	834	977
5% MTN	£300m	2042	306	306
5.125% MTN	€600m	2047	587	628
5.2% MTN	£500m	2057	500	500
Other MTNs	–	–	267	285
Other loans	–	–	780	358
			11,744	12,391

(a) The 4% RPI MTN is redeemable at par, indexed for increases in the Retail Price Index (RPI) over the life of the MTN. (b) The 3.322% LPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN. The maximum indexation of the principal in any one year is 5%, with a minimum of 0%. (c) The 1.982% RPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN.

Borrowing facilities

The Group has the following undrawn committed facilities available at 27 February 2010, in respect of which all conditions precedent had been met as at that date:

	2010£m	2009£m
Expiring within one year	–	100
Expiring between one and two years	1,000	–
Expiring in more than two years	1,600	2,600
	2,600	2,700

All facilities incur commitment fees at market rates and would provide funding at floating rates.

Notes to the Group financial statements continued

Note 22 Financial instruments

Finance income of £20m (2009 – finance costs of £30m) resulted from hedge ineffectiveness.

Fair value hedges

The Group maintains interest rate and cross-currency swap contracts as fair value hedges of the interest rate and currency risk on fixed rate debt issued by the Group. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Group Income Statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss on the hedging instrument and hedged item is recognised in the Group Income Statement within finance income or costs. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying value of the hedged item is amortised to the Group Income Statement under the effective interest rate method.

A loss of £65m on hedging instruments was recognised during the year, offset by a gain of £85m on hedged items (2009 – a gain of £1,197m on hedging instruments was offset by a loss of £1,227m on hedged items).

Cash flow hedges

The hedging instruments are primarily used to hedge purchases in Euros and US Dollars. The cash flows hedged will occur and will affect the Group Income Statement within one year of the balance sheet date.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is recognised in the Group Income Statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the Group Income Statement.

Net investment hedges

The Group has a South Korean Won denominated liability relating to the future purchase of the minority shareholding of its subsidiary, Samsung Tesco Co. Limited. This liability has been designated as a net investment hedge of a proportion of the assets of Samsung Tesco Co. Limited.

Gains and losses accumulated in equity are included in the Group Income Statement on disposal of the overseas operation.

Financial instruments not qualifying for hedge accounting

The Group has a liability relating to the future purchase of the minority shareholding of its subsidiary, dunnhumby Limited. Changes in the value of the liability are recognised immediately in the Group Income Statement within finance income or costs.

The fair value of derivative financial instruments have been disclosed in the Group Balance Sheet as follows:

		2010		2009
	Asset£m	Liability£m	Asset£m	Liability£m
Current	224	(146)	382	(525)
Non-current	1,250	(776)	1,478	(302)
	1,474	(922)	1,860	(827)

Note 22 Financial instruments continued

The fair value and notional amounts of derivatives analysed by hedge type are as follows:

				2010				2009
		Asset		Liability		Asset		Liability
	Fair value£m	Notional£m	Fair value£m	Notional£m	Fair value£m	Notional£m	Fair value£m	Notional£m
Fair value hedges
Interest rate swaps and similar instruments	10	685	(88)	2,304	6	307	(67)	2,123
Cross currency swaps	1,130	4,513	(45)	259	1,219	3,957	(39)	825
Cash flow hedges
Interest rate swaps and similar instruments	–	–	(40)	555	–	100	(66)	400
Cross currency swaps	129	315	(205)	1,064	227	357	(1)	171
Forward foreign currency contracts	19	483	(15)	600	101	1,762	(24)	348
Net investment hedges
Forward foreign currency contracts	19	244	(172)	1,037	92	2,623	(194)	2,767
Cross currency swaps	–	–	(30)	124	–	–	–	–
Future purchases of minority interests	–	–	(105)	–	–	–	(167)	–
Derivatives not in a formal hedge relationship
Interest rate swaps and similar instruments	140	1,140	(114)	1,350	1	774	(35)	3,740
Cross currency swaps	2	204	(25)	533	25	411	(47)	639
Forward foreign currency contracts	25	635	(42)	1,254	189	2,784	(154)	2,767
Future purchases of minority interests	–	–	(41)	–	–	–	(33)	–
Total	1,474	8,219	(922)	9,080	1,860	13,075	(827)	13,780

The carrying value and fair value of financial assets and liabilities are as follows:

		2010		2009
	Carryingvalue	Fairvalue	CarryingvalueRestated	FairvalueRestated
Assets	£m	£m	£m	£m
Cash and cash equivalents	2,819	2,819	3,509	3,509
Loans and advances to customers – Tesco Bank	4,112	4,325	3,388	3,388
Loans and advances to banks and other financial assets – Tesco Bank	144	144	1,541	1,541
Short-term investments	1,314	1,314	1,233	1,233
Other investments – Tesco Bank	863	848	259	259
Joint venture loan receivables (note 30)	309	309	262	262

Derivative financial assets:Interest rate swaps and similar instruments	150	150	7	7

Cross currency swaps	1,261	1,261	1,471	1,471
Forward foreign currency contractsTotal financial assets	6311,035	6311,233	38212,052	38212,052
LiabilitiesShort-term borrowings:
Amortised cost	(771)	(770)	(3,191)	(3,190)
Bonds in fair value hedge relationships	(713)	(683)	(233)	(223)
Long-term borrowings:
Amortised cost	(5,513)	(5,617)	(5,248)	(5,028)
Bonds in fair value hedge relationships	(6,067)	(5,992)	(6,947)	(6,147)
Finance leases (Group as lessee – note 35)	(209)	(209)	(243)	(243)
Customer deposits – Tesco Bank	(4,357)	(4,357)	(4,538)	(4,538)
Deposits by banks – Tesco Bank	(30)	(30)	(24)	(24)
Derivative and other financial liabilities:
Interest rate swaps and similar instruments	(242)	(242)	(168)	(168)
Cross currency swaps	(305)	(305)	(87)	(87)
Forward foreign currency contracts	(229)	(229)	(372)	(372)
Future purchases of minority interests	(146)	(146)	(200)	(200)
Total financial liabilities	(18,582)	(18,580)	(21,251)	(20,220)
Total	(7,547)	(7,347)	(9,199)	(8,168)

Financial statements

Notes to the Group financial statements continued

Note 22 Financial instruments continued

The fair values of financial instruments have been determined by reference to prices available from the markets on which the instruments are traded. The fair value of all other items have been calculated by discounting expected future cash flows at prevailing interest rates. The above table excludes other receivables/payables, which have fair values equal to their carrying values.

Financial assets and liabilities by category

The accounting classifications of each class of financial assets and liabilities as at 27 February 2010 and 28 February 2009 are as follows:

At 27 February 2010	Available-for-sale£m	Loans andreceivables/other financialliabilities£m	Fair valuethroughprofit or loss£m	Total£m
Cash and cash equivalents	–	2,819	–	2,819
Loans and advances to customers – Tesco Bank	–	4,112	–	4,112
Loans and advances to banks and other financial assets – Tesco Bank	–	144	–	144
Short-term investments	–	1,314	–	1,314
Other investments – Tesco Bank	604	259	–	863
Joint venture loan receivables (note 30)	–	309	–	309
Customer deposits – Tesco Bank	–	(4,357)	–	(4,357)
Deposits by banks – Tesco Bank	–	(30)	–	(30)
Short-term borrowings	–	(1,484)	–	(1,484)
Long-term borrowings	–	(11,580)	–	(11,580)
Finance leases (Group as lessee – note 35)	–	(209)	–	(209)
Derivative financial instruments:
Interest rate swaps and similar instruments	–	–	(92)	(92)
Cross currency swaps	–	–	956	956
Forward foreign currency contracts	–	–	(166)	(166)
Future purchases of minority interests	–	–	(146)	(146)
	604	(8,703)	552	(7,547)

At 28 February 2009	Loans andreceivables/other financialliabilitiesRestated£m	Fair valuethroughprofit or lossRestated£m	TotalRestated£m
Cash and cash equivalents	3,509	–	3,509
Loans and advances to customers – Tesco Bank	3,388	–	3,388
Loans and advances to banks and other financial assets – Tesco Bank	1,541	–	1,541
Short-term investments	1,233	–	1,233
Other investments – Tesco Bank	259	–	259
Joint venture loan receivables (note 30)	262	–	262
Customer deposits – Tesco Bank	(4,538)	–	(4,538)
Deposits by banks – Tesco Bank	(24)	–	(24)
Short-term borrowings	(3,424)	–	(3,424)
Long-term borrowings	(12,195)	–	(12,195)
Finance leases (Group as lessee – note 35)	(243)	–	(243)
Derivative financial instruments:
Interest rate swaps and similar instruments	–	(161)	(161)
Cross currency swaps	–	1,384	1,384
Forward foreign currency contracts	–	10	10
Future purchases of minority interests	–	(200)	(200)
	(10,232)	1,033	(9,199)

Fair value measurement

Effective from 1 March 2009, the Group adopted the amendment to IFRS 7 for financial instruments that are measured in the Group Balance Sheet at fair value. This requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);
inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and
inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

Note 22 Financial instruments continued

The following table presents the Group's financial assets and liabilities that are measured at fair value at 27 February 2010:

	Level 1£m	Level 2£m	Level 3£m	Total£m
Assets
Available-for-sale financial assets	–	604	–	604
Derivative financial instruments:
Interest rate swaps and similar instruments	–	150	–	150
Cross currency swaps	–	1,261	–	1,261
Forward foreign currency contracts	–	63	–	63
Total assets	–	2,078	–	2,078
Liabilities
Derivative financial instruments:
Interest rate swaps and similar instruments	–	(242)	–	(242)
Cross currency swaps	–	(305)	–	(305)
Forward foreign currency contracts	–	(229)	–	(229)
Future purchases of minority interests	–	–	(146)	(146)
Total liabilities	–	(776)	(146)	(922)
Total	–	1,302	(146)	(1,156)

The following table presents the changes in Level 3 instruments for the year ending 27 February 2010:

	£m
Opening balance	(200)
Losses recognised in finance costs in the Group Income Statement	(26)
Losses recognised in reserves	(11)
Cash flow	91
Closing balance	(146)

Note 23 Financial risk factors

The main financial risks faced by the Group relate to fluctuations in interest and foreign exchange rates, the risk of default by counterparties to financial transactions, and the availability of funds to meet business needs. These risks are managed as described below. The Group Balance Sheet position at 27 February 2010 is representative of the position throughout the year.

Interest rate risk

The Group has RPI debt where the principal is indexed to increases in the RPI index. RPI debt is treated as floating rate debt. The Group also has LPI debt, where the principal is indexed to RPI, with an annual maximum increase of 5% and a minimum of 0%. LPI debt is treated as fixed rate debt.

For interest rate risk relating to Tesco Bank please refer to the separate section on Tesco Bank financial risk factors.

Notes to the Group financial statements continued

Note 23 Financial risk factors continued

During 2010 and 2009, net debt was managed using derivative instruments to hedge interest rate risk as follows:

			2010			2009
	Fixed	Floating	Total	FixedRestated	FloatingRestated	TotalRestated
	£m	£m	£m	£m	£m	£m
Cash and cash equivalents	–	2,819	2,819	–	3,509	3,509
Loans and advances to customers – Tesco Bank	1,827	2,285	4,112	3,388	–	3,388
Loans and advances to banks and other financial assets – Tesco Bank	144	–	144	–	1,541	1,541
Short-term investments	–	1,314	1,314	–	1,233	1,233
Other investments – Tesco Bank	581	282	863	259	–	259
Joint venture loan receivables	–	309	309	–	262	262
Finance leases	(83)	(126)	(209)	(84)	(159)	(243)
Bank and other borrowings	(11,806)	(1,258)	(13,064)	(11,540)	(4,079)	(15,619)
Customer deposits – Tesco Bank	–	(4,357)	(4,357)	–	(4,538)	(4,538)
Deposits by banks – Tesco Bank	(30)	–	(30)	–	(24)	(24)
Future purchases of minority interests	(146)	–	(146)	(200)	–	(200)
Derivative effect:
Interest rate swaps	(2,215)	2,215	–	(415)	415	–
Cross currency swaps	6,677	(6,677)	–	4,524	(4,524)	–
Caps and collars	120	(120)	–	774	(774)	–
Total	(4,931)	(3,314)	(8,245)	(3,294)	(7,138)	(10,432)

Credit risk

The counterparty exposure under derivative contracts is £1,474m (2009 – £1,860m). The Group policy is to transact derivatives only with counterparties rated at least A1 by Moody's.

The Group considers its maximum credit risk to be £11.0bn (2009 – £12.1bn), being the Group's total financial assets.

For credit risk relating to Tesco Bank please refer to the separate section on Tesco Bank financial risk factors on page 109.

Liquidity risk

Liquidity risk is managed by short-term and long-term cash flow forecasts. In addition, the Group has committed facility agreements for £2.6bn (2009 – £2.7bn), which mature between 2011 and 2014.

The Group has a European Medium Term Note programme of £15.0bn, of which £10.6bn was in issue at 27 February 2010 (2009 – £11.0bn), plus a Euro Commercial Paper programme of £2.0bn, none of which was in issue at 27 February 2010 (2009 – £1.6bn), and a US Commercial Paper programme of $4.0bn, none of which was in issue at 27 February 2010 (2009 – £nil).

For liquidity risk relating to Tesco Bank please refer to the separate section on Tesco Bank financial risk factors on page 109.

Note 23 Financial risk factors continued

The following is an analysis of the undiscounted contractual cash flows payable under financial liabilities and derivatives. The potential cash outflow of £15.6bn is considered acceptable as it is offset by financial assets and trade receivables of £12.9bn (2009 – £16.9bn offset by financial assets and trade receivables of £13.9bn).

At 27 February 2010	Duewithin1 year£m	Duebetween1 and 2years£m	Duebetween2 and 3years£m	Duebetween3 and 4years£m	Duebetween4 and 5years£m	Duebeyond5 years£m
Non-derivative financial liabilities
Bank and other borrowings	(1,484)	(1,078)	(1,615)	(845)	(637)	(7,267)
Interest payments on borrowings	(554)	(518)	(491)	(405)	(370)	(4,605)
Customer deposits – Tesco Bank	(4,357)	–	–	–	–	–
Deposits by banks – Tesco Bank	(30)	–	–	–	–	–
Finance leases	(49)	(47)	(33)	(11)	(10)	(178)
Trade and other payables	(9,282)	(56)	(26)	(4)	(7)	(67)
Derivative and other financial liabilities
Net settled derivative contracts – receipts	71	50	50	48	21	19
Net settled derivative contracts – payments	(164)	(119)	(59)	(35)	(56)	(695)
Gross settled derivative contracts – receipts	1,966	1,747	757	867	759	5,273
Gross settled derivative contracts – payments	(1,703)	(1,362)	(689)	(866)	(653)	(3,792)
Future purchases of minority interests	–	(131)	(25)	–	–	–
Total	(15,586)	(1,514)	(2,131)	(1,251)	(953)	(11,312)
	Duewithin	Duebetween1 and 2	Duebetween2 and 3	Duebetween3 and 4	Duebetween4 and 5	Duebeyond

	1 year	years	years	years	years	5 years
At 28 February 2009 (restated)	£m	£m	£m	£m	£m	£m
Non-derivative financial liabilities
Bank and other borrowings	(3,028)	(971)	(873)	(1,931)	(225)	(7,943)
Interest payments on borrowings	(560)	(549)	(514)	(486)	(411)	(5,045)
Customer deposits – Tesco Bank	(4,538)	–	–	–	–	–
Deposits by banks – Tesco Bank	(24)	–	–	–	–	–
Finance leases	(55)	(51)	(48)	(32)	(9)	(172)
Trade and other payables	(8,522)	(34)	(5)	(2)	(4)	(23)
Derivative and other financial liabilities
Net settled derivative contracts – receipts	104	17	9	5	4	1
Net settled derivative contracts – payments	(245)	(30)	(19)	(23)	(13)	(112)
Gross settled derivative contracts – receipts	4,657	1,186	1,247	404	708	5,707
Gross settled derivative contracts – payments	(4,577)	(957)	(1,053)	(313)	(671)	(4,652)
Future purchases of minority interests	(93)	–	(87)	(20)	–	–
Total	(16,881)	(1,389)	(1,343)	(2,398)	(621)	(12,239)

Foreign exchange risk

The Group is exposed to foreign exchange risk principally via:

Net investment exposure, from the value of net investments outside the UK. The Group hedges a proportion of its investments in its international subsidiaries via foreign currency transactions and borrowings in matching currencies, which are formally designated as net investment hedges.
Loans to non-UK subsidiaries. These are hedged via foreign currency transactions and borrowings in matching currencies, which are not formally designated as hedges, as gains and losses on hedges and hedged loans will naturally offset.

Notes to the Group financial statements continued

Note 23 Financial risk factors continued

The impact on Group financial statements from foreign currency volatility is shown in the sensitivity analysis below.

Sensitivity analysis

It should be noted that the sensitivity analysis reflects the impact on income and equity due to all financial instruments held at the balance sheet date. It does not reflect any change in sales or costs that may result from changing interest or exchange rates.

The following assumptions were made in calculating the sensitivity analysis:

the sensitivity of interest payable to movements in interest rates is calculated on net floating rate debt, deposits and derivative instruments with no sensitivity assumed for RPI-linked debt;
changes in the carrying value of derivative financial instruments designated as fair value hedges from movements in interest rates or foreign exchange rates have an immaterial effect on the Group Income Statement and equity due to compensating adjustments in the carrying value of debt;
changes in the carrying value of derivative financial instruments designated as net investment hedges from movements in foreign exchange rates are recorded directly in equity;
changes in the carrying value of derivative financial instruments not designated as hedging instruments only affect the Group Income Statement;
all other changes in the carrying value of derivative financial instruments designated as hedging instruments are fully effective with no impact on the Group Income Statement;
debt with a maturity below one year is floating rate for the interest payable part of the calculation; and
the floating leg of any swap or any floating rate debt is treated as not having any interest rate already set, therefore a change in interest rates affects a full 12-month period for the interest payable portion of the sensitivity calculations.

Using the above assumptions, the following table shows the illustrative effect on the Group Income Statement and equity that would result from changes in UK interest rates, and in exchange rates:

		2010		2009
	Incomegain/(loss)£m	Equitygain/(loss)£m	Incomegain/(loss)£m	Equitygain/(loss)£m
1% increase in GBP interest rates (2009 – 1%)	(38)	–	(59)	–
15% appreciation of the Euro (2009 – 25%)	(13)	(43)	(22)	(22)
10% appreciation of the South Korean Won (2009 – 20%)	–	(82)	(1)	(222)
25% appreciation of the US Dollar (2009 – 25%)	(1)	(8)	(11)	218
25% appreciation of the Thai Baht (2009 – 25%)	–	(1)	–	(1)
10% appreciation of the Czech Koruna (2009 – 25%)	–	(31)	–	(204)
5% appreciation of the Polish Zloty (2009 – 15%)	–	–	14	–

A decrease in interest rates and a depreciation of foreign currencies would have the opposite effect to the impact in the table above.

The impact on equity from changing exchange rates results principally from foreign currency deals used as net investment hedges. The impact on equity will largely be offset by the revaluation in equity of the hedged assets. For changes in the USD/GBP exchange rate, the impact on equity results principally from forward purchases of US Dollars as cash flow hedges.

Capital risk

To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, buy back shares and cancel them or issue new shares. In April 2006, the Group outlined its plan to release cash from its property assets, via a sequence of property joint ventures and other transactions, and return significant value to shareholders, either through enhanced dividends or share buy-backs. The target for the value of share buy-backs was increased from £1.5bn to £3.0bn over a five-year period from April 2007. Whilst the Group continued with the policy at the beginning of 2009, it subsequently used the proceeds from property divestment to pay down debt, following the two major acquisitions in 2009 (Homever and Tesco Bank). During 2009 the Group purchased and cancelled £100m ordinary shares. In the financial year 2010 the Group continued to use the proceeds from the sale of property to pay down debt, which it expects to continue in 2011.

Tesco Bank

Interest rate risk

Credit risk

Credit risk is the probability of customers and counterparties failing to meet their obligations to Tesco Bank and arises principally from Tesco Bank's lending activities but also from other transactions involving on and off-balance sheet instruments. Limits have been established for all counterparties based on their respective credit ratings. The limits and proposed counterparties are reviewed and approved by the Risk Management Committee (RMC) of Tesco Bank.

Liquidity risk

Liquidity risk is managed on a consolidated basis within Tesco Bank's banking activities and adheres to the liquidity requirements set by the Financial Services Authority (FSA) from time to time. To meet regulatory requirements a diversified portfolio of high quality liquid and marketable assets is maintained. Cash flow commitments and marketable asset holdings are measured and managed on a daily basis. Tesco Bank has credit facilities sufficient to meet all foreseeable outflow requirements as they fall due and its liquidity risk is further mitigated by its well diversified retail deposit base.

Expressed as an annual probability of default, the upper and lower boundaries and the midpoint for each of the asset quality grades are as follows:

Annual probability of default Minimum Midpoint Maximum S&P Asset quality grade % % % equivalent AQ1 0.00 0.10 0.20 AAA to BBB-AQ2 0.21 0.40 0.60 BB+ to BB AQ3 0.61 1.05 1.50 BB- to B+ AQ4 1.51 3.25 5.00 B+ to B AQ5 5.01 52.50 100.00 B and below Accruing Non- Impairment AQ1 AQ2 AQ3 AQ4 AQ5 past due accrual provision Total At 27 February 2010 £m £m £m £m £m £m £m £m £m Assets: Other investments 863 – – – – – – – 863 Loans and advances to customers 501 381 762 1,495 838 76 373 (314) 4,112 Loans and advances to banks and other financial assets 144 – – – – – – – 144 Total assets 1,508 381 762 1,495 838 76 373 (314) 5,119 Commitments (note 33) 3,926 1,329 573 452 184 – – – 6,464 Total off balance sheet 3,926 1,329 573 452 184 – – – 6,464 Accruing Non- Impairment AQ1 AQ2 AQ3 AQ4 AQ5 past due accrual provision Total At 28 February 2009 (restated) £m £m £m £m £m £m £m £m £m Assets: Other investments 259 – – – – – – – 259 Loans and advances to customers 352 652 828 870 563 82 291 (250) 3,388 Loans and advances to banks and other financial assets 1,541 – – – – – – – 1,541 Total assets 2,152 652 828 870 563 82 291 (250) 5,188 Commitments (note 33) 3,103 1,451 744 305 129 – – – 5,732 Total off balance sheet 3,103 1,451 744 305 129 – – – 5,732

At 27 February 2010 and 28 February 2009

Notes to the Group financial statements continued

Note 23 Financial risk factors continued

Insurance risk

Tesco Bank is exposed to insurance risk indirectly through its profit sharing commission arrangement with The Royal Bank of Scotland Group PLC. Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to the expectations at the time of underwriting.

The frequency and severity of claims and the sources of uncertainty for the key classes that Tesco Bank is exposed to are as follows:

Motor insurance

Claims experience is quite variable, due to a wide range of factors, but the principal ones are age, gender and driving experience, type and nature of vehicle, use of vehicle and area. There are many sources of uncertainty that will affect Tesco Bank's experience under motor insurance including operational risk, reserving risk, premium rates not matching claims inflation rates, the weather, the social, economic and legislative environment and reinsurance failure risk.

Property insurance

The major causes of claims for property insurance are theft, flood, escape of water, fire, storm, subsidence and various types of accidental damage. The major source of uncertainty is the volatility of weather.

Note 24 Customer deposits

	2010£m	2009£m
Customer deposits4,357		4,538

Customer deposits are recorded at amortised cost and are repayable on demand.

Note 25 Deposits by banks

The Group has deposits by banks with the following maturity:

	2010£m	2009£m
Within three months	30	24

Deposits by banks are recorded at amortised cost.

Note 26 Provisions

	Propertyprovisions£m	Otherprovision£m	Total£m
At 23 February 2008	27	–	27
Foreign currency translation	3	–	3
Acquisitions through business combinations (restated)	93	99	192
Amount utilised in the year	(12)	–	(12)
At 28 February 2009 (restated)	111	99	210
Foreign currency translation	12	–	12
Amount provided in the year	–	1	1
Amount utilised in the year	(12)	–	(12)
At 27 February 2010	111	100	211

Property provisions comprise future rents payable net of rents receivable on onerous and vacant property leases, provisions for terminal dilapidations and provisions for future rents above market value on unprofitable stores. The majority of the provision is expected to be utilised over the period to 2020.

The other provision balance relates to a provision for customer redress in respect of potential customer complaints. This is likely to be utilised over several years.

The balances are analysed as follows:

	2010	2009
	£m	Restated£m
Current	39	10
Non-current	172	200
	211	210

Note 27 Share-based payments

The total Group Income Statement charge for the year recognised in respect of share-based payments is £300m (2009 restated – £246m), which is made up of share option schemes and share bonus payments. Of this amount £241m (2009 restated – £208m) will be equity-settled and £59m (2009 – £38m) cash-settled.

a) Share option schemes

The Company had nine share option schemes in operation during the year, all of which are equity-settled schemes:

i) The Savings-related Share Option Scheme (1981) permits the grant to employees of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from employees of an amount between £5 and £250 per four-weekly period. Options are capable of being exercised at the end of the three- or five-year period at a subscription price not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date.
ii) The Irish Savings-related Share Option Scheme (2000) permits the grant to Irish employees of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from employees of an amount between €12 and €320 per four-weekly period. Options are capable of being exercised at the end of the three- or five-year period at a subscription price not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date.
iii) The Approved Executive Share Option Scheme (1994) was adopted on 17 October 1994. The exercise of options granted under this scheme will normally be conditional upon the achievement of a specified performance target related to the growth in earnings per share over a three-year period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme.
iv) The Unapproved Executive Share Option Scheme (1996) was adopted on 7 June 1996. The exercise of options granted under this scheme will normally be conditional upon the achievement of a specified performance target related to the growth in earnings per share over a three-year period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme.
v) The International Executive Share Option Scheme (1994) was adopted on 20 May 1994. This scheme permits the grant to selected non-UK executives of options to acquire ordinary shares on substantially the same basis as their UK counterparts. The exercise of options granted under this scheme will normally be conditional on the achievement of a specified performance target related to the growth in earnings per share over a threeyear period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme.
vi) The Executive Incentive Plan (2004) was adopted on 5 July 2004. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options are normally exercisable between three and ten years from the date of grant for nil consideration.
vii) The Performance Share Plan (2004) was adopted on 5 July 2004 and amended on 29 June 2007. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options granted before 29 June 2007 are normally exercisable between four and ten years from the date of grant for nil consideration. Options granted after 29 June 2007 are normally exercisable between three and ten years from the date of grant for nil consideration. The exercise of options will normally be conditional on the achievement of specified performance targets related to the return on capital employed over a three-year period.
viii) The Discretionary Share Option Plan (2004) was adopted on 5 July 2004. This scheme permits the grant of approved, unapproved and international options in respect of ordinary shares to selected executives. Options are normally exercisable between three and ten years from the date of grant at a price not less than the middle-market quotation or average middle-market quotations of an ordinary share for the dealing day or three dealing days preceding the date of grant. The exercise of options will normally be conditional on the achievement of a specified performance target related to the annual percentage growth in earnings per share over a three-year period. There will be no discounted options granted under this scheme.
ix) The Group New Business Incentive Plan (2007) was adopted on 29 June 2007. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options will normally vest in four tranches: four, five, six and seven years after the date of grant and will be exercisable for up to two years from the vesting dates for nil consideration. The exercise of options will normally be conditional on the achievement of specified performance targets related to the return on capital employed over the seven-year plan.

The following tables reconcile the number of share options outstanding and the weighted average exercise price (WAEP):

For the year ended 27 February 2010

		Savings-relatedshare option scheme		Irish savings-relatedshare option scheme		Approvedshare option scheme		Unapprovedshare option scheme	International executive	share option scheme		Nil costshare options
	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP
Outstanding at28 February
2009	142,810,097		306.21 5,418,903		315.67 15,868,920		350.56 81,299,884		339.97 43,898,205		366.61 14,323,708	0.00
Granted	38,117,516		328.00 1,752,363		328.00 2,844,857		338.40 26,542,534		338.42 19,097,981		338.82 3,093,147	0.00
Forfeited	(9,476,452)	315.43	(873,617)	314.96					(581,769) 409.75 (3,213,394) 409.29 (2,147,644) 403.74 (2,299,256)			0.00
Exercised	(33,216,641)	257.20							(842,581) 270.60 (3,581,117) 286.54 (18,721,402) 273.16 (5,967,794) 291.66 (5,932,144)			0.00
Outstanding at27 February2010	138,234,520		323.37 5,455,068		326.70 14,550,891		361.57 85,907,622		351.46 54,880,748	363.64	9,185,455	0.00
Exercisable as at27 February2010	6,287,764	266.10	369,370		282.75 5,868,560		282.29 32,430,807		280.29 15,277,598	289.05	–	–
Exercise pricerange (pence)		195.00 to307.00		195.00 to307.00		197.50 to388.75		197.50 to415.50		197.50 to318.60		–
Weighted averageremainingcontractuallife (years)		0.18		0.15		4.26		4.53		4.75		–

Notes to the Group financial statements continued

Note 27 Share-based payments continued

For the year ended 28 February 2009

		Savings-relatedshare option scheme		Irish savings-relatedshare option scheme		Approvedshare option scheme		Unapprovedshare option scheme		International executiveshare option scheme		Nil costshare options
	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP
Outstanding at23 February
2008	153,361,820		281.40 5,083,009		300.71 16,229,846		324.45 77,043,605		307.00 36,970,259		333.22 10,838,238	0.00
Granted	38,531,375		311.00 1,642,089		311.00 3,308,213		426.79 18,297,370		426.82 13,664,591	422.88	3,591,855	0.00
Forfeited	(10,351,962)	299.64	(485,512)	293.84					(901,163) 384.34 (2,768,871) 388.51 (3,268,614)	327.65	–	–
Exercised	(38,731,136)	214.48	(820,683)		226.80 (2,767,976)				277.55 (11,272,220) 243.72 (3,468,031) 269.07		(106,385)	0.00
Outstanding at28 February2009	142,810,097		306.21 5,418,903		315.67 15,868,920		350.56 81,299,884		339.97 43,898,205		366.61 14,323,708	0.00
Exercisable as at28 February2009	6,553,484	220.72	398,093		233.61 5,574,827		259.54 36,205,357		260.09 12,340,929		268.72 2,048,225	0.00
Exercise pricerange (pence)		159.00 to248.00		159.00 to248.00		197.50 to313.50		164.00 to313.50		176.70 to312.75		0.00
Weighted averageremainingcontractual
life (years)		0.18		0.15		3.99		4.63		4.76		5.83

Share options were exercised on a regular basis throughout the year. The average share price during the year ended 27 February 2010 was 380.05p (2009 – 372.06p).

			2010			2009
	Savings-relatedshareoptionschemes	Executiveshareoptionschemes	Nil costoptionschemes	Savings-relatedshareoptionschemes	Executiveshareoptionschemes	Nil costoptionschemes
Expected dividend yield (%)	3.6%	3.6-3.9%	0.0%	3.3%	3.3%	0.0%
Expected volatility (%)	26-31%	25%	25%	25-30%	25%	25%
Risk-free interest rate (%)	2.0-2.8%	2.8-3.3%	2.9%	3.2-3.8%	3.2-4.9%	4.6-4.9%
Expected life of option (years)	3 or 5	6	6	3 or 5	6	6
Weighted average fair value of options granted (pence)	86.74	64.24	374.00	89.28	93.90	418.09
Probability of forfeiture (%)	14-16%	10%	0%	20-25%	10%	0%
Share price (pence)	378.00	345.23	374.00	361.00	425.20	418.09
Weighted average exercise price (pence)	328.00	338.58	0.00	311.00	425.20	0.00

b) Share bonus schemes

Eligible UK employees are able to participate in Shares in Success, an all-employee profit-sharing scheme. Each year, shares are awarded as a percentage of earnings up to a statutory maximum of £3,000. Eligible Republic of Ireland employees are able to participate in a Share Bonus Scheme, an allemployee profit sharing scheme. Each year, employees receive a percentage of their earnings as either cash or shares.

Senior management in the US business also participate in the US Long-Term Incentive Plan (2007) which was adopted on 29 June 2007. The awards made under this Plan will normally vest in four tranches: four, five, six and seven years after the date of award, for nil consideration. Vesting will normally be conditional on the achievement of specified performance targets related to the return on capital employed in the US business over the seven-year plan.

Note 27 Share-based payments continued

The number and weighted average fair value (WAFV) of share bonuses awarded during the period were:

		2010	2009
	Sharesnumber	WAFVSharespencenumber	WAFVpence
Shares in Success	28,661,004349.66	21,295,232	431.05
Executive Incentive Scheme	13,731,567	355.51 10,996,677	415.68
Performance Share Plan	2,120,058375.37	2,123,237	353.76
US Long-Term Incentive Plan	80,622482.00	673,716	403.80

Note 28 Post-employment benefits

Pensions

Defined contribution plans

The contributions payable for defined contribution schemes of £12m (2009 – £11m) have been fully expensed against profits in the current year.

Defined benefit plans

United Kingdom

At the date of the last actuarial valuation the actuarial deficit was £275m. The market value of the schemes' assets was £3,987m and these assets represented 94% of the benefits that had accrued to members, after allowing for expected increases in earnings and pensions in payment.

During the year, the One Stop Senior Executive Pension Scheme was merged into the Tesco PLC Pension Scheme. As the One Stop Scheme was already part of the Group there has been no impact on the overall disclosures. The One Stop Scheme had a net liability of £4.6m at 28 February 2009.

Overseas

The most significant overseas scheme is the funded defined benefit pension scheme which operates in the Republic of Ireland. An independent actuary, using the projected unit method, carried out the latest actuarial assessment of the scheme as at 1 April 2007.

The valuations used for IAS 19 have been based on the most recent actuarial valuations and updated by Towers Watson Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes as at 27 February 2010. The schemes' assets are stated at their market values as at 27 February 2010. Towers Watson Limited have updated the most recent Republic of Ireland valuation. The liabilities relating to retirement healthcare benefits have also been determined in accordance with IAS 19, and are incorporated in the following tables.

Principal assumptions

The valuations used have been based on the most recent actuarial valuations and updated by Towers Watson Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes as at 27 February 2010. The major assumptions, on a weighted average basis, used by the actuaries were as follows:

	2010%	2009%
Rate of increase in salaries	3.6	3.7
Rate of increase in pensions in payment*	3.4	3.1
Rate of increase in deferred pensions*	3.6	3.2
Rate of increase in career average benefits	3.6	3.2
Discount rate	5.9	6.5
Price inflation	3.6	3.2

* In excess of any Guaranteed Minimum Pension (GMP) element.

The main financial assumption is the real discount rate (the excess of the discount rate over the rate of price inflation). If this assumption increased/ decreased by 0.1%, the UK defined benefit obligation would decrease/increase by approximately £140m and the annual UK current service cost would decrease/increase by approximately £17m.

Note 28 Post-employment benefits continued

Changes in the present value of defined benefit obligations are as follows:

	2010	2009
	£m	£m
Opening defined benefit obligation	(4,914)	(4,927)
Current service cost	(391)	(428)
Interest cost	(313)	(313)
(Loss)/gain on change of assumptions	(1,052)	760
Experience losses	(1)	(117)
Foreign currency translation	–	(13)
Benefits paid	144	132
Actual member contributions	(9)	(8)
Closing defined benefit obligation	(6,536)	(4,914)

The amounts that have been charged to the Group Income Statement and Group Statement of Comprehensive Income for the year ended 27 February 2010 are set out below:

	2010£m	2009£m
Analysis of the amount charged to operating profit:
Current service cost	(391)	(428)
Total charge to operating profit	(391)	(428)
Analysis of the amount (charged)/credited to finance (cost)/income:
Expected return on pension schemes' assets	265	338
Interest on pension schemes' liabilities	(313)	(313)
Net pension finance (cost)/income (note 5)	(48)	25
Total charge to the Group Income Statement	(439)	(403)
Analysis of the amount recognised in the Group Statement of Comprehensive Income:
Actual return less expected return on pension schemes' assets	733	(1,270)
Experience losses arising on the schemes' liabilities	(1)	(117)
Foreign currency translation	(2)	(2)
Changes in assumptions underlying the present value of the schemes' liabilities	(1,052)	760
Total loss recognised in the Group Statement of Comprehensive Income	(322)	(629)

The cumulative losses recognised through the Group Statement of Comprehensive Income since the date of transition to IFRS are £1,323m (2009 – £1,001m).

Summary of movements in deficit during the year

	2010£m	2009£m
Deficit in schemes at beginning of the year	(1,494)	(838)
Current service cost	(391)	(428)
Other finance (cost)/income	(48)	25
Contributions by employer	415	376
Foreign currency translation	(2)	(2)
Actuarial loss	(320)	(627)
Deficit in schemes at end of the year	(1,840)	(1,494)

History of movements

The historical movement in defined benefit pension schemes assets and liabilities and history of experience gains and losses are as follows:

	2010£m	2009£m	2008£m	2007£m	2006£m
Total market value of assets	4,696	3,420	4,089	4,007	3,448
Present value of liabilities relating to unfunded schemes	(54)	(39)	(34)	(27)	(17)
Present value of liabilities relating to partially funded schemes	(6,482)	(4,875)	(4,893)	(4,930)	(4,642)
Pension deficit	(1,840)	(1,494)	(838)	(950)	(1,211)
Experience gains/(losses) on scheme assets	733	(1,270)	(465)	82	309
Experience losses on plan liabilities	(1)	(117)	(20)	(41)	(24)

Financial statements

Note 28 Post-employment benefits continued

Changes in the present value of defined benefit obligations are as follows:

	2010	2009
	£m	£m
Opening defined benefit obligation	(4,914)	(4,927)
Current service cost	(391)	(428)
Interest cost	(313)	(313)
(Loss)/gain on change of assumptions	(1,052)	760
Experience losses	(1)	(117)
Foreign currency translation	–	(13)
Benefits paid	144	132
Actual member contributions	(9)	(8)
Closing defined benefit obligation	(6,536)	(4,914)

The amounts that have been charged to the Group Income Statement and Group Statement of Comprehensive Income for the year ended 27 February 2010 are set out below:

	2010£m	2009£m
Analysis of the amount charged to operating profit:
Current service cost	(391)	(428)
Total charge to operating profit	(391)	(428)
Analysis of the amount (charged)/credited to finance (cost)/income:
Expected return on pension schemes' assets	265	338
Interest on pension schemes' liabilities	(313)	(313)
Net pension finance (cost)/income (note 5)	(48)	25
Total charge to the Group Income Statement	(439)	(403)
Analysis of the amount recognised in the Group Statement of Comprehensive Income:
Actual return less expected return on pension schemes' assets	733	(1,270)
Experience losses arising on the schemes' liabilities	(1)	(117)
Foreign currency translation	(2)	(2)
Changes in assumptions underlying the present value of the schemes' liabilities	(1,052)	760
Total loss recognised in the Group Statement of Comprehensive Income	(322)	(629)

The cumulative losses recognised through the Group Statement of Comprehensive Income since the date of transition to IFRS are £1,323m (2009 – £1,001m).

Summary of movements in deficit during the year

	2010£m	2009£m
Deficit in schemes at beginning of the year	(1,494)	(838)
Current service cost	(391)	(428)
Other finance (cost)/income	(48)	25
Contributions by employer	415	376
Foreign currency translation	(2)	(2)
Actuarial loss	(320)	(627)
Deficit in schemes at end of the year	(1,840)	(1,494)

History of movements

The historical movement in defined benefit pension schemes assets and liabilities and history of experience gains and losses are as follows:

	2010£m	2009£m	2008£m	2007£m	2006£m
Total market value of assets	4,696	3,420	4,089	4,007	3,448
Present value of liabilities relating to unfunded schemes	(54)	(39)	(34)	(27)	(17)
Present value of liabilities relating to partially funded schemes	(6,482)	(4,875)	(4,893)	(4,930)	(4,642)
Pension deficit	(1,840)	(1,494)	(838)	(950)	(1,211)
Experience gains/(losses) on scheme assets	733	(1,270)	(465)	82	309
Experience losses on plan liabilities	(1)	(117)	(20)	(41)	(24)

Notes to the Group financial statements continued

Note 28 Post-employment benefits continued

Post-employment benefits other than pensions

The Company operates a scheme offering retirement healthcare benefits. The cost of providing these benefits has been accounted for on a similar basis to that used for defined benefit pension schemes.

The liability as at 27 February 2010 of £12m (2009 – £10m) was determined in accordance with the advice of independent actuaries. In 2010, £0.7m (2009 – £0.7m) has been charged to the Group Income Statement and £0.5m (2009 – £0.5m) of benefits were paid.

A change of 1.0% in assumed healthcare cost trend rates would have the following effect:

	2010£m	2009£m
Effect of a 1% increase in assumed healthcare cost trend rate on:
Service and interest cost	0.1	0.1
Defined benefit obligation	1.5	1.6
Effect of a 1% decrease in assumed healthcare cost trend rate on:
Service and interest cost	(0.1)	(0.1)
Defined benefit obligation	(1.5)	(1.3)

Expected contributions

A formal actuarial valuation is carried out triennially for the scheme trustees by a professionally qualified independent actuary. The purpose of the valuation is to agree a funding plan to ensure that present and future contributions should be sufficient to meet future liabilities. The actuarial valuation of approved schemes as at 31 March 2008 has been concluded and the Group's contributions are increasing to 11.1% from 10.9%. On this basis the Group expects to make contributions of approximately £430m to defined benefit pension schemes in the year ending 27 February 2011.

Note 29 Called up share capital

		2010		2009
	Ordinary shares of 5p each		Ordinary shares of 5p each
	Number	£m	Number	£m
Authorised:
At beginning of year	10,858,000,000	543	10,858,000,000	543
Authorised during the year	2,500,000,000	125	–	–
At end of year	13,358,000,000	668	10,858,000,000	543
Allotted, called up and fully paid:
At beginning of year	7,895,344,018	395	7,863,498,783	393
Share options	62,329,535	3	57,060,046	3
Share bonus scheme	27,370,504	1	–	–
Share buy-back	–	–	(25,214,811)	(1)
At end of year	7,985,044,057	399	7,895,344,018	395

During the financial year, 62 million (2009 – 57 million) shares of 5p each were issued in relation to share options for aggregate consideration of £166m (2009 – £130m).

During the financial year, 27 million (2009 – nil) shares of 5p each were issued in relation to share bonus awards for consideration of £1m (2009 – £nil).

During the year, the Company purchased and subsequently cancelled no shares of 5p each. During 2009, the Company purchased and subsequently cancelled 25,214,811 shares of 5p each, representing 0% of the called up share capital, at an average share price of 3.98 per share. The total consideration, including expenses, £100m. The excess of the consideration over the nominal value was charged to retained earnings.

Between 28 February 2010 and 16 April 2010 options over 3,722,750 ordinary shares have been exercised under the terms of the Savings-related Share Option Scheme (1981) and the Irish Savings-related Share Option Scheme (2000). Between 28 February 2010 and 16 April 2010, options over 5,592,493 ordinary shares have been exercised under the terms of the Executive Share Option Schemes (1994 and 1996) and the Discretionary Share Option Plan (2004).

As at 27 February 2010, the Directors were authorised to purchase up to a maximum in aggregate of 790.1 million (2009 – 784.8 million) ordinary shares.

The owners of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the meetings of the Company.

Capital redemption reserve

Note 30 Related party transactions

i) Trading transactions

		Sales torelated parties		Purchases fromrelated parties		Amounts owedby related parties		Amounts owedto related parties
	2010£m	2009£m	2010£m	2009£m	2010£m	2009£m	2010£m	2009£m
Joint ventures	154	183	360	290	6	14	18	6
Associates	–	–	1,313	1,175	–	–	24	156

Sales to related parties consists of services/management fees and loan interest.

Purchases from related parties include £226m (2009 – £174m) of rentals payable to the Group's joint ventures, including those joint ventures formed as part of the sale and leaseback programme.

Purchases from associates include £1,312m (2009 – £1,171m) of fuel purchased from Greenergy International Limited.

ii) Non-trading transactions

	Sales torelated parties			Loans torelated parties		Loans fromrelated parties		Injection ofequity funding
	2010£m	2009£m	2010£m	2009£m	2010£m	2009£m	2010£m	2009£m
Joint ventures	87	465	309	262	23	20	83	–

Transactions between the Group and the Group's pension plans are disclosed in note 28.

On 25 June 2009, the Group formed a limited partnership with Tesco Pension Trustees. The limited partnerships contain twelve stores and two distribution centres which have been sold from and leased back to the Group. The Group sold assets for net proceeds of £386m to the limited partnership. The Group's share of the profit realised from this transaction is included within profit arising on property-related items.

On 23 September 2009, the Group formed a limited partnership with a third party. The limited partnerships contain fifteen stores and two distribution centres which have been sold from and leased back to the Group. The Group sold assets for net proceeds of £460m to the limited partnership. The Group's share of the profit realised from this transaction is included within profit arising on property-related items.

iii) Transactions with key management personnel

Transactions on an arm's length basis with Tesco Bank during the year were as follows:

		Credit card andpersonal loan balances		Saving deposit accounts
	Number of keymanagementpersonnel	£m	Number of keymanagementpersonnel	£m
At 28 February 2009	2	–	2	–
At 27 February 2010	–	–	4	1

During the current and prior year, there were no other material transactions or balances between the Group and its key management personnel or their close family members.

Notes to the Group financial statements continued

Note 31 Reconciliation of profit before tax to cash generated from operations

	2010	2009
	£m	Restated£m
Profit before tax	3,176	2,917
Net finance costs	314	362
Share of post-tax profits of joint ventures and associates	(33)	(110)
Operating profit	3,457	3,169
Depreciation and amortisation	1,384	1,189
Profit arising on property-related items	(377)	(236)
Loss arising on sale of non property-related items	5	3
Impairment of goodwill	131	–
Net reversal of impairment of property, plant and equipment	(26)	(22)
Adjustment for non-cash element of pensions charge	(24)	52
Share-based payments	241	208
Decrease/(increase) in inventories	34	(95)
Decrease in trade and other receivables	124	79
Increase in trade and other payables	453	724
Increase in trade and other receivables – Tesco Bank	(28)	–
Increase in trade and other payables – Tesco Bank	75	–
Increase in loans and advances to customers	(724)	(20)
Decrease/(increase) in loans and advances to banks, other financial assets and receivables	1,397	(1,538)
(Decrease)/increase in customer deposits, payables and other financial liabilities	(175)	1,465
Increase in working capital	1,156	619
Cash generated from operations	5,947	4,978

The increase in working capital includes the impact of translating foreign currency working capital movements at average exchange rates rather than period end exchange rates.

Note 32 Analysis of changes in net debt

	28 February2009	At Tesco Bank at28 February2009Restated	Cash flow£m	Othernon-cash	movements of Tesco Bank	AtElimination 27 February2010
	£m	£m		£m	£m	£m
Cash and cash equivalents	3,472	37	(739)	49	(204)	2,615
Short-term investments	1,233	–	81	–	–	1,314
Joint venture loan and other receivables	262	–	45	13	–	320
Derivative financial instruments and other financial assets	1,858	2	(78)	(308)	(2)	1,472
Cash and receivables	6,825	39	(691)	(246)	(206)	5,721
Bank and other borrowings	(3,424)	–	2,909	(969)	256	(1,228)
Finance lease payables	(47)	–	41	(39)	–	(45)
Derivative financial instruments and other liabilities	(483)	(42)	(51)	430	14	(132)
Debt due within one year	(3,954)	(42)	2,899	(578)	270	(1,405)
Bank and other borrowings	(11,973)	(222)	(392)	1,007	224	(11,356)
Finance lease payables	(196)	–	–	32	–	(164)
Derivative financial instruments and other liabilities	(302)	–	(10)	(464)	51	(725)
Debt due after one year	(12,471)	(222)	(402)	575	275	(12,245)
	(9,600)	(225)	1,806	(249)	339	(7,929)

Note 33 Commitments and contingencies

Capital commitments

At 27 February 2010 there were commitments for capital expenditure contracted for, but not provided, of £1,835m (2009 – £1,551m), principally relating to the store development programme.

Note 33 Commitments and contingencies continued

Contingent liabilities

For details of assets held under finance leases, which are pledged as security for the finance lease liabilities, see note 11.

There are a number of contingent liabilities that arise in the normal course of business which if realised are not expected to result in a material liability to the Group. The Group recognises provisions for liabilities when it is more likely than not a settlement will be required and the value of such a payment can be reliably estimated.

In September 2007, the Office of Fair Trading issued its provisional findings in its Statement of Objections relating to the alleged collusion between certain large supermarkets and dairy processors. On 30 April 2010, the Office of Fair Trading announced that it had decided to drop the allegations against the Group in relation to milk and butter in the dairy investigation. The Office of Fair Trading agreed a discretionary penalty discount of 10% for the Group not contesting the two remaining allegations which related to cheese. The Group has however made no admission of wrongdoing. The discounted fine will become payable after the OFT issues its decision later this year and is immaterial to the Group and therefore no provision has been recognised in the Group's financial statements.

Tesco Bank

At 27 February 2010, Tesco Bank has commitments of formal standby facilities, credit lines and other commitments to lend, totalling £6.5bn (2009 – £5.7bn). The amount is intended to provide an indication of the potential volume of business and not of the underlying credit or other risks.

The FSCS meets its obligations by raising management expense levies. These include amounts to cover the interest on its borrowings and compensation levies on the industry. Each deposit-taking institution contributes in proportion to its share of total protected deposits. The levy is calculated based on deposit balances held as at 31 December in each year and as such, this is seen as the 'trigger event' under accounting rules.

Note 34 Capital resources

The following table shows the composition of regulatory capital resources of Tesco Personal Finance PLC (being the regulated entity) at the balance sheet date:

	2010£m	2009£m
Tier 1 capital:
Shareholders' funds and minority interests	576	521
Tier 2 capital:
Qualifying subordinated debt	235	205
Other interests in tier 2 capital	21	19
Supervisory deductions	(263)	(259)
Total regulatory capital	569	486

The movement of tier 1 capital during the year is analysed as follows:

	2010£m	2009*£m
Beginning of the year	521	514
Share capital and share premium	230	–
Profit attributable to shareholders	37	7
Ordinary dividends	(153)	–
Increase in intangible assets	(59)	–
End of the year	576	521

* Tesco Personal Finance PLC was acquired as part of Tesco Personal Finance Group Limited on 19 December 2008.

It is Tesco Personal Finance PLC's (TPF) policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, TPF has regard to the supervisory requirements of the Financial Services Authority ('FSA'). The FSA uses Risk Asset Ratio ('RAR') as a measure of capital adequacy in the UK banking sector, comparing a bank's capital resources with its risk-weighted assets (the assets and off-balance sheet exposures are 'weighted' to reflect the inherent credit and other risks); by international agreement the RAR should be not less than 8% with a Tier 1 component of not less than 4%. TPF has complied with the FSA's capital requirements throughout the year.

Notes to the Group financial statements continued

Note 35 Leasing commitments

Finance lease commitments – Group as lessee

Future minimum lease payments under finance leases and hire purchase contracts, together with the present value of the net minimum lease payments are as follows:

	Minimum lease payments			Present value ofminimum lease payments
	2010£m	2009£m	2010£m	2009£m
Within one year	49	55	45	47
Greater than one year but less than five years	101	140	90	114
After five years	178	172	74	82
Total minimum lease payments	328	367	209	243
Less future finance charges	(119)	(124)
Present value of minimum lease payments	209	243
Analysed as:
Current finance lease payables	45	47
Non-current finance lease payables	164	196
	209	243

Operating lease commitments – Group as lessee

Future minimum rentals payable under non-cancellable operating leases are as follows:

	2010£m	2009£m
Within one year	1,043	754
Greater than one year but less than five years	3,702	3,069
After five years	10,004	9,170
Total minimum lease payments	14,749	12,993

The Group has lease break options on certain sale and leaseback transactions, which are exercisable if an existing option to buy back leased assets at market value at a specified date is also exercised, no commitment has been included in respect of the buy-back option as the option is at the Group's discretion. The Group is not obliged to pay lease rentals after that date and so minimum lease payments exclude those falling after the buy-back date.

Operating lease commitments with joint ventures

Since 1988, the Group has entered into several joint ventures and sold and leased back properties to and from these joint ventures. The terms of these sale and leasebacks vary, however, common factors include: the sale of the properties to the joint venture at market value, options within the lease for the Group to repurchase the properties at market value, market rent reviews and 20-30 year lease terms. The Group reviews the substance as well as the form of the arrangements when making the judgement as to whether these leases are operating or finance leases; all of the leases under these arrangements are operating leases.

Operating lease receivables – Group as lessor

	2010£m	2009£m
Within one year	259	201
Greater than one year but less than five years	566	445
After five years	348	335
Total minimum lease payments	1,173	981

Independent auditors' report to the members of Tesco PLC

We have audited the Group financial statements of Tesco PLC for the 53 weeks ended 28 February 2009 which comprise the Group Income Statement, the Group Balance Sheet, the Group Cash Flow Statement, the Group Statement of Recognised Income and Expense and the related notes. These Group financial statements have been prepared under the accounting policies set out therein.

We have reported separately on the Parent Company financial statements of Tesco PLC for the 53 weeks ended 28 February 2009 and on the information in the Directors' Remuneration Report that is described as having been audited.

Respective responsibilities of Directors and auditors

The Directors' responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as endorsed by the European Union are set out in the Statement of Directors' Responsibilities.

Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Report of the Directors is consistent with the Group financial statements.

In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and other transactions is not disclosed.

We review whether the Corporate Governance Statement reflects the Company's compliance with the nine provisions of the Combined Code (2006) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group's corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report and consider whether it is consistent with the audited Group financial statements. The other information comprises only the Introduction, the Financial highlights, Chairman's statement, Tesco at a glance, the Chief Executive's Q&A, the Report of the Directors, the Corporate governance statement, the unaudited part of the Directors' remuneration report and the Five year record. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements.

Opinion

In our opinion:

the Group financial statements give a true and fair view, in accordance with IFRSs as endorsed by the European Union, of the state of the Group's affairs as at 28 February 2009 and of its profit and cash flows for the 53 weeks then ended;
the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and
the information given in the Report of the Directors is consistent with the Group financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants and Registered Auditors London 1 May 2009

Group income statement

53 weeks ended 28 February 2009	notes	2009£m	2008*£m
Continuing operations
Revenue (sales excluding VAT)	2	54,327	47,298
Cost of sales		(50,109)	(43,668)
Gross profit		4,218	3,630
Administrative expenses		(1,248)	(1,027)
Profit arising on property-related items	2/3	236	188
Operating profit	2	3,206	2,791
Share of post-tax profits of joint ventures and associates	13	110	75
Finance income	5	116	187
Finance costs	5	(478)	(250)
Profit before tax	3	2,954	2,803
Taxation	6	(788)	(673)
Profit for the year		2,166	2,130
Attributable to:
Equity holders of the parent	30	2,161	2,124
Minority interests	30	5	6
		2,166	2,130
Earnings per share
Basic	9	27.50p	26.95p
Diluted	9	27.31p	26.61p

Non-GAAP measure: underlying profit before tax
notes	2009£m	2008*£m
Profit before tax	2,954	2,803
Adjustments for:
IAS 32 and IAS 39 'Financial Instruments' – Fair value remeasurements1/5	88	(49)
IAS 19 Income Statement charge for pensions28	403	414
'Normal' cash contributions for pensions28	(376)	(340)
IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods1	27	18
IFRS 3 Amortisation charge from intangible assets arising on acquisition1	32	–
Underlying profit before tax1	3,128	2,846

* Results for the year ended 23 February 2008 include 52 weeks of operation.

Group statement of recognised income and expense

53 weeks ended 28 February 2009	notes	2009£m	2008*£m
Change in fair value of available-for-sale investments		3	(4)
Foreign currency translation		(275)	38
Total (loss)/gain on defined benefit pension schemes	28	(629)	187
Gains/(losses) on cash flow hedges:
Net fair value gains		505	66
Reclassified and reported in the Group Income Statement		(334)	(29)
Tax on items taken directly to equity	6	435	123
Net (expense)/income recognised directly in equity		(295)	381
Profit for the year		2,166	2,130
Total recognised income and expense for the year	30	1,871	2,511
Attributable to:

Equity holders of the parent 1,872 2,500 Minority interests (1) 11 1,871 2,511

* Results for the year ended 23 February 2008 include 52 weeks of operation.

Group balance sheet

28 February 2009	notes	2009£m	2008£m
Non-current assets
Goodwill and other intangible assets	10	4,027	2,336
Property, plant and equipment	11	23,152	19,787
Investment property	12	1,539	1,112
Investments in joint ventures and associates	13	62	305
Other investments	14	259	4
Loans and advances to customers	17	1,470	–
Derivative financial instruments	22	1,478	216
Deferred tax assets	6	21	104
		32,008	23,864
Current assets
Inventories	15	2,669	2,430
Trade and other receivables	16	1,798	1,311
Loans and advances to customers	17	1,918	–
Loans and advances to banks and other financial assets	18	2,129	–
Derivative financial instruments	22	382	97
Current tax assets		9	6
Short-term investments		1,233	360
Cash and cash equivalents	19	3,509	1,788
		13,647	5,992
Non-current assets classified as held for sale	7	398	308
		14,045	6,300
Current liabilities
Trade and other payables	20	(8,522)	(7,277)
Financial liabilities
Borrowings	21	(4,059)	(2,084)
Derivative financial instruments and other liabilities	22	(525)	(443)
Customer deposits	24	(4,538)	–
Deposits by banks	25	(24)	–
Current tax liabilities		(362)	(455)
Provisions	26	(10)	(4)
		(18,040)	(10,263)
Net current liabilities		(3,995)	(3,963)
Non-current liabilities
Financial liabilities
Borrowings	21	(12,391)	(5,972)
Derivative financial instruments and other liabilities	22	(302)	(322)
Post-employment benefit obligations	28	(1,494)	(838)
Other non-current payables	20	(68)	(42)
Deferred tax liabilities	6	(696)	(802)
Provisions	26	(67)	(23)
		(15,018)	(7,999)
Net assets		12,995	11,902
Equity
Share capital	29/30	395	393

Share premium account	30	4,638	4,511
Other reserves	30	40	40
Retained earnings	30	7,865	6,871
Equity attributable to equity holders of the parent		12,938	11,815
Minority interests	30	57	87
Total equity		12,995	11,902

Sir Terry Leahy Laurie McIlwee

Directors

The financial statements on pages 68 to 123 were authorised for issue by the Directors on 1 May 2009 and are subject to the approval of the shareholders at the Annual General Meeting on 3 July 2009.

Group cash flow statement

53 weeks ended 28 February 2009notes	2009£m	2008*£m
Cash flows from operating activities
Cash generated from operations33	4,978	4,099
Interest paid	(562)	(410)
Corporation tax paid	(456)	(346)
Net cash from operating activities	3,960	3,343
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired	(1,275)	(169)
Purchase of property, plant and equipment and investment property	(4,487)	(3,442)
Proceeds from sale of property, plant and equipment	994	1,056
Purchase of intangible assets	(220)	(158)
Increase in loans to joint ventures	(242)	(36)
Investments in joint ventures and associates	(30)	(61)
Investments in short-term investments	(1,233)	(360)
Proceeds from sale of short-term investments	360	–
Dividends received	69	88
Interest received	90	128
Net cash used in investing activities	(5,974)	(2,954)
Cash flows from financing activities
Proceeds from issue of ordinary share capital	130	138
Proceeds from sale of ordinary share capital to minority interests	–	16
Increase in borrowings	7,387	9,333
Repayment of borrowings	(2,733)	(7,593)
New finance leases	–	119
Repayment of obligations under finance leases	(18)	(32)
Dividends paid	(883)	(792)
Dividends paid to minority interests	(3)	(2)
Own shares purchased	(265)	(775)
Net cash from financing activities	3,615	412
Net increase in cash and cash equivalents	1,601	801
Cash and cash equivalents at beginning of year	1,788	1,042
Effect of foreign exchange rate changes	120	(55)
Cash and cash equivalents at end of year19	3,509	1,788

* Results for the year ended 23 February 2008 include 52 weeks of operation.

Reconciliation of net cash flow to movement in net debt note

53 weeks ended 28 February 2009notes	2009£m	2008*£m
Net increase in cash and cash equivalents	1,601	801
Elimination of net increase in TPF cash and cash equivalents	(37)	–
Net cash inflow from debt and lease financing	(4,636)	(1,827)
Short-term investments	873	360
Movement in joint venture loan receivables	242	36
Debt acquired on acquisition of Homever	(611)	–
Transfer of joint venture loan receivable on acquisition of TPF	(91)	–
Other non-cash movements	(759)	(691)
Increase in net debt in the year	(3,418)	(1,321)
Opening net debt34	(6,182)	(4,861)
Closing net debt34	(9,600)	(6,182)

* Results for the year ended 23 February 2008 include 52 weeks of operation.

Notes to the Group financial statements

Note 1 Accounting policies

General information

Tesco PLC is a public limited company incorporated and domiciled in the United Kingdom under the Companies Act 1985 (Registration number 445790). The address of the registered office is Tesco House, Delamare Road, Cheshunt, Hertfordshire, EN8 9SL, UK.

The financial year represents the 53 weeks to 28 February 2009 (prior financial year 52 weeks to 23 February 2008) and includes 53 weeks of trading for the UK, Republic of Ireland (ROI) and United States of America (US) businesses.

As described in the Report of the Directors, the main activity of the Group is that of retailing and financial services.

Statement of compliance

Basis of preparation

The financial statements are presented in Pounds Sterling, rounded to the nearest million. They are prepared on the historical cost basis, except for certain financial instruments, share-based payments and pensions that have been measured at fair value.

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

Basis of consolidation

Where necessary, adjustments are made to the financial statements of subsidiaries, joint ventures and associates to bring the accounting policies used into line with those of the Group.

Subsidiaries

A subsidiary is an entity whose operating and financing policies are controlled, directly or indirectly, by Tesco PLC.

The accounts of the Parent Company's subsidiary undertakings are prepared to dates around the Group year end.

The financial statements of subsidiaries are included in the consolidated 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

A joint venture is an entity in which the Group holds an interest on a longterm basis and which is jointly controlled by the Group and one or more other venturers under a contractual agreement.

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

Use of assumptions and estimates

Critical estimates and assumptions are made in particular with regard to establishing uniform depreciation and amortisation periods for the Group, impairment testing (including loans), provisions for onerous leases and dilapidations, assumptions for measuring pension provisions and fair value of share-based payments, determination of the fair value of obligations to purchase minority interests and fair value of derivative financial instruments, classification of leases as operating leases versus finance leases (including on sale and leasebacks), the likelihood that tax assets can be realised and the classification of certain operations as held for sale.

Revenue

Retailing Revenue consists of sales through retail outlets.

Commission income is recorded based on the terms of the contracts and is recognised when the service is provided.

Financial Services

Revenue consists of interest, fees and commission receivable.

Interest income on financial assets that are classified as loans and receivables is determined using the effective interest rate method. This is the method of calculating the amortised cost of a financial asset or for a group of assets, and of allocating the interest income over the expected life of the asset. The effective interest rate is the rate that discounts the estimated future cash flows to the instrument's initial carrying amount. 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.

Insurance commission received by the Group is accrued over the term of the policy.

Clubcard and loyalty initiatives

The cost of Clubcard is treated as a cost of sale, with an accrual equal to the estimated fair value of the points issued recognised when the original transaction occurs. On redemption, the cost of redemption is offset against the accrual.

The fair value of the points awarded is determined with reference to the cost of redemption and considers factors such as redemption via Clubcard deals versus money-off in-store and redemption rate.

Computers for Schools and Sport for Schools and Clubs vouchers are issued by Tesco for redemption by participating schools/clubs and are part of our overall Community Plan. The cost of the redemption (i.e. meeting the obligation attached to the vouchers) is treated as a cost rather than as a deduction from sales.

Other income

Finance income, excluding income arising from financial services is recognised in the period to which it relates on an accruals basis. Dividends are recognised when a legal entitlement to payment arises.

Operating profit

Operating profit is stated after profit arising on property-related items but before the share of results of joint ventures and associates, finance income and finance costs.

Property, plant and equipment

Property, plant and equipment assets are carried at cost less accumulated depreciation and any recognised impairment in value.

Property, plant and equipment assets are depreciated on a straight-line basis to their residual value over their anticipated useful economic lives.

The following depreciation rates are applied for the Group:

Freehold and leasehold buildings with greater than 40 years unexpired at 2.5% of cost;
Leasehold properties with less than 40 years unexpired are depreciated by equal annual instalments over the unexpired period of the lease; and
Plant, equipment, fixtures and fittings and motor vehicles at rates varying from 9% to 50%.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, when shorter, over the term of the relevant lease.

All tangible fixed assets are reviewed for impairment in accordance with IAS 36 'Impairment of Assets' when there are indications that the carrying value may not be recoverable.

Borrowing costs

For Tesco Personal Finance Group Limited interest expense on financial liabilities is determined using the effective interest rate method and is recognised in cost of sales.

Investment property

Leasing

The Group as a lessor

Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease.

The Group as a lessee

Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability is included in the Group Balance Sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the Group Income Statement.

Rentals payable under operating leases are charged to the Group Income Statement on a straight-line basis over the term of the relevant lease.

Sale and leaseback

Following initial recognition, the lease treatment is consistent with those principles described above.

Business combinations and goodwill

All business combinations are accounted for by applying the purchase method.

The Group recognises intangible assets as part of business combinations at fair value at the date of acquisition. The determination of these fair values is based upon management's judgement and includes assumptions on the timing and amount of future incremental cash flows generated by the assets acquired and the selection of an appropriate cost of capital. The useful lives of intangible assets are estimated, and amortisation charged on a straight-line basis.

Notes to the Group financial statements continued

Note 1 Accounting policies continued

Goodwill arising on consolidation represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets/net liabilities of the acquired subsidiary, joint venture or associate at the date of acquisition. If the cost of acquisition is less than the fair value of the Group's share of the net assets/net liabilities of the acquired entity (i.e. a discount on acquisition) then the difference is credited to the Group Income Statement in the period of acquisition.

Any impairment is recognised immediately in the Group Income Statement and is not subsequently reversed.

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.

Intangible assets

Acquired intangible assets

Internally-generated intangible assets – Research and development expenditure Research costs are expensed as incurred.

Development expenditure incurred on an individual project is carried forward only if all the criteria set out in IAS 38 'Intangible Assets' are met, namely:

an asset is created that can be identified (such as software or new processes);
it is probable that the asset created will generate future economic benefits; and
the development cost of the asset can be measured reliably.

Following the initial recognition of development expenditure, the cost is amortised over the project's estimated useful life, usually at 14%-25% of cost per annum.

Impairment of tangible and intangible assets excluding goodwill

At each Balance Sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). 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.

Other investments

Other investments in the Group Balance Sheet comprise equity investments and available-for-sale financial assets. Refer to the financial instruments accounting policy for further detail.

Equity investments are recognised at amortised cost and available-for-sale financial assets are recognised at fair value.

Inventories

Short-term investments

Short-term investments in the Group Balance Sheet consist of deposits with money market funds.

Cash and cash equivalents

Non-current assets held for sale

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Pensions and similar obligations

The Group accounts for pensions and other post-employment benefits (principally private healthcare) under IAS 19 'Employee Benefits'.

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

Share-based payments

The fair value of employee share option plans is calculated at the grant date using the Black-Scholes model. In accordance with IFRS 2 'Sharebased payment', 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 year, using tax rates enacted or substantively enacted by the Balance Sheet date. Tax is recognised in the Group Income Statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

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 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 equity, in which case the deferred tax is also recognised in equity.

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 asset to be recovered.

Foreign currencies

Transactions in foreign currencies are translated 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 at the rates prevailing on the Balance Sheet date. All differences are taken to the Group Income Statement for the period.

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 on the Group's Balance Sheet when the Group becomes a party to the contractual provisions of the instrument.

Trade receivables

Investments

Investments are recognised at trade date. Investments are classified as either held for trading or available-for-sale, and are recognised at fair value.

There are no investments classified as held for trading.

Loans and advances

Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and include amounts due from customers and amounts due from other banks. The Group has no intention of trading these loans and advances and consequently they are not classified as held for trading or designated as fair value through profit and loss. 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 impairment losses. Income from these financial assets is calculated on an effective yield basis and is recognised in the Group Income Statement.

Impairment of loans and advances

At each Balance Sheet date, the Group reviews the carrying amounts of its loans and advances to determine whether there is any indication that those assets have suffered an impairment loss. An impairment loss has been incurred if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.

Notes to the Group financial statements continued

Note 1 Accounting policies continued

Impairment losses are recognised in the Group Income Statement and the carrying amount of the financial asset or group of financial assets reduced by establishing an allowance for impairment losses. If in a subsequent period the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.

Financial liabilities and equity instruments

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 cost 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 stated at amortised cost.

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 and interest rate risks arising from operating, financing and investing activities. The Group does not hold or issue derivative financial instruments for trading purposes, however if derivatives do not qualify for hedge accounting they are accounted for as such.

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

Fair value hedging

Derivative financial instruments qualifying for fair value hedge accounting are principally interest rate swaps (including cross currency swaps).

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 instrument is recognised directly in equity.

Derivative instruments qualifying for cash flow hedging are principally forward foreign exchange transactions and currency options.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs or the original hedged item affects the Group Income Statement. If a forecasted hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the Group Income Statement.

Net investment hedging

Derivative 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 derivative instrument is recognised directly in equity. Any ineffective element is recognised immediately in the Group Income Statement. Gains and losses accumulated in equity are included in the Group Income Statement when the foreign operation is disposed of.

Derivative instruments qualifying for net investment hedging are principally forward foreign exchange transactions and currency options.

Treatment of agreements to acquire minority interests The Group has entered into a number of agreements to purchase the remaining shares of subsidiaries with minority shareholdings.

Under IAS 32 'Financial Instruments: Presentation', the net present value of the expected future payments are shown as a financial liability. At the end of each period, the valuation of the liability is reassessed with any changes recognised in the Group Income Statement within finance income or costs for the year. Where the liability is in a currency other than Pounds Sterling, the liability has been designated as a net investment hedge. Any change in the value of the liability resulting from changes in exchange rates is recognised directly in equity.

Securitisation transactions

During 2008/9 the Group has entered into a securitisation transaction and issued debt securities. The debt securities in issue and the loans and advances to customers are recorded on the Group's Balance Sheet within current borrowings and loans and advances to customers.

Provisions

Provisions are recognised when there is a present legal or constructive obligation as a result of a past event, for which it is probable that a transfer of economic benefits will be required to settle the obligation, and where a reliable estimate can be made of the amount of the obligation.

Provisions for onerous leases are recognised when the Group believes that the unavoidable costs of meeting the lease obligations exceed the economic benefits expected to be received under the lease. Where material these leases are discounted to their present value. Provisions for dilapidation costs are recognised on a lease by lease basis.

Recent accounting developments

Standards, amendments and interpretations effective for 2008/9 or issued and early adopted:

In preparing the Group financial statements for the current year, the Group has adopted the following new IFRS, amendments to IFRS and IFRIC Interpretations which have not had a significant impact on the results or net assets of the Group:

Amendments to IAS 39 'Financial Instruments: Recognition and Measurement' and IFRS 7 'Financial Instruments: Disclosures', effective from 1 July 2008. These amendments permit the reclassification of financial assets in particular circumstances. The adoption of the amendments to IAS 39 and IFRS 7 has had no impact on the results or net assets of the Group.
IFRIC 11 'Group and Treasury Share Transactions', effective for annual periods beginning on or after 1 March 2007.
IFRIC 12 'Service Concession Arrangements', effective for annual periods beginning on or after 1 January 2008. This interpretation applies to public sector service concession operators and explains how to account for the obligations undertaken and rights received in service concession arrangements. No member of the Group is an operator and hence the adoption of IFRIC 12 has had no impact on the results or net assets of the Group.

Standards, amendments and interpretations not yet effective, but not expected to have a significant impact on the Group:

IFRS 8 'Operating Segments', effective for annual periods beginning on or after 1 January 2009. This new standard replaces IAS 14 'Segment Reporting' and requires segmental information to be presented on the same basis that management uses to evaluate performance of its reporting segments in its management reporting. We do not expect the adoption of IFRS 8 to have a significant impact upon the results or net assets of the Group.

Amendment to IAS 23 'Borrowing Costs', effective for annual periods beginning on or after 1 January 2009. The standard has been revised to require capitalisation of borrowing costs when such costs relate to a qualifying asset. We do not expect the adoption of the amendment to IAS 23 to have a significant impact upon the results or net assets of the Group.
IFRIC 14 'The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction', effective for annual periods beginning on or after 1 January 2009 as endorsed by the EU. This interpretation provides guidance on how to assess the limit on the amount of surplus in a defined benefit scheme that can be recognised as an asset under IAS 19 'Employee Benefits'. We do not expect the adoption of IFRIC 14 to have a significant impact upon the results or net assets of the Group.

Standards, amendments and interpretations not yet effective and under review as to their impact on the Group:

Amendment to IAS 1 'Presentation of Financial Statements', effective for annual periods beginning on or after 1 January 2009.
Amendment to IAS 27 'Consolidated and Separate Financial Statements', effective for annual periods beginning on or after 1 July 2009.
Amendment to IAS 32 'Financial Instruments: Presentation' and IAS 1 'Presentation of Financial Statements'– Puttable Instruments and Instruments with Obligations Arising on Liquidation, effective for annual periods beginning on or after 1 January 2009.
Amendment to IAS 39 'Financial Instruments: Recognition and Measurement'– Eligible hedged items, effective for annual periods beginning on or after 1 July 2009.
Amendments to IFRS 1 'First-time Adoption of IFRSs' and IAS 27 'Consolidated and Separate Financial Statements'– Cost of an Investment of a Subsidiary, Jointly Controlled Entity or Associate, effective for annual reporting periods beginning on or after 1 January 2009.
Amendment to IFRS 2 'Share-Based Payment'– Vesting Conditions and Cancellations, effective for annual periods beginning on or after 1 January 2009.
Amendments to IFRS 3 'Business Combinations', effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009.
IFRIC 13 'Customer Loyalty Programmes', effective for annual periods beginning on or after 1 July 2008. This interpretation requires customer loyalty award credits to be accounted for as a separate component of the sales transaction in which they are granted and therefore part of the fair value of the consideration received is allocated to the award credits and deferred over the period that the award credits are fulfilled.
IFRIC 15 'Agreements for the Construction of Real Estate', effective for annual periods beginning on or after 1 January 2009.
IFRIC 16 'Hedges of a Net Investment in a Foreign Operation', effective for annual periods beginning on or after 1 October 2008.
IFRIC 17 'Distributions of Non-Cash Assets to Owners', effective for annual periods beginning on or after 1 July 2009.
IFRIC 18 'Transfers of Assets from Customers', effective for transfers of assets from customers received on or after 1 July 2009.

Notes to the Group financial statements continued

Note 1 Accounting policies continued

The adjustments made to reported profit before tax are:

IAS 32 and IAS 39 'Financial Instruments' – fair value remeasurements – Under IAS 32 and IAS 39, the Group applies hedge accounting to its various hedge relationships when allowed under the rules of IAS 39 and when practical to do so. Sometimes the Group is unable to apply hedge accounting to the arrangements, but continues to enter into these arrangements as they provide certainty or active management of the exchange rates and interest rates applicable to the Group. The Group believes these arrangements remain effective and economically and commercially viable hedges despite the inability to apply hedge accounting.

Where hedge accounting is not applied to certain hedging arrangements, the reported results reflect the movement in fair value of related derivatives due to changes in foreign exchange and interest rates. In addition, at each period end, any gain or loss accruing on open contracts is recognised in the Group Income Statement for the period, regardless of the expected outcome of the hedging contract on termination. This may mean that the Group Income Statement charge is highly volatile, whilst the resulting cash flows may not be as volatile. The underlying profit measure removes this volatility to help better identify underlying business performance. During 2008/9, £10m (2007/8 – £nil) of the IAS 32/39 charge arose in the share of post-tax profit of joint ventures and associates, with the remainder in finance income/costs.

IAS 19 Income Statement charge for pensions – Under IAS 19 'Employee Benefits', the cost of providing pension benefits in the future is discounted to a present value at the corporate bond yield rates applicable on the last day of the previous financial year. Corporate bond yield rates vary over time which in turn creates volatility in the Group Income Statement and Group Balance Sheet. IAS 19 also increases the charge for young pension schemes, such as Tesco's, by requiring the use of rates which do not take into account the future expected returns on the assets held in the pension scheme which will fund pension liabilities as they fall due. The sum of these two effects makes the IAS 19 charge disproportionately higher and more volatile than the cash contributions the Group is required to make in order to fund all future liabilities.

Therefore, within underlying profit we have included the 'normal' cash contributions for pensions but excluded the volatile element of IAS 19 to represent what the Group believes to be a fairer measure of the cost of providing post-employment benefits.

IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods – The amount charged to the Group Income Statement in respect of operating lease costs and incentives is expected to increase significantly as the Group expands its International business. The leases have been structured in a way to increase annual lease costs as the businesses expand. IAS 17 'Leases' requires the total cost of a lease to be recognised on a straight-line basis over the term of the lease, irrespective of the actual timing of the cost. The impact of this treatment in 2008/9 was an adverse charge of £27m (2007/8 – £18m) to the Group Income Statement after deducting the impact of the straight-line treatment recognised as rental income within share of post-tax profits of joint ventures and associates.

IFRS 3 Amortisation charge from intangible assets arising on acquisition – Under IFRS 3 'Business Combinations', intangible assets are separately identified and valued. The intangible assets are required to be amortised on a straight-line basis over their useful economic lives and as such is a non-cash charge that does not reflect the underlying performance of the business acquired.
Exceptional items Due to their significance and special nature, certain other items which do not reflect the Group's underlying performance have been excluded from underlying profit. These gains or losses can have a significant impact on both absolute profit and profit trends; consequently, they are excluded from the underlying profit of the Group. There are no exceptional items in 2008/9 and 2007/8.

Segmental trading profit

Segmental trading profit is an adjusted measure of operating profit, which measures the performance of each geographical segment before profit/ (loss) arising on property-related items, impact on leases of annual uplifts in rent and rent-free periods, amortisation charge from intangible assets arising on acquisition and replaces the IAS 19 pension charge with the 'normal' cash contributions for pensions.

Note 2 Segmental reporting

The Board has determined that the primary segmental reporting format is geographical, based on the Group's management and internal reporting structure. Secondary information is reported by business segments, which comprises retailing and financial services.

In 2007/8, the UK reporting segment included the start-up operations in the United States of America (US), which were not material. The results of the US business have been reported as a separate reporting segment within International in our results for 2008/9. The comparatives have been restated to reflect the US as a separate segment. The impact of this is to transfer sales of £16m and a loss of £67m from the UK segment to the US segment in 2007/8. In addition, the UK reporting segment includes the results for Tesco Personal Finance Group Limited (TPF) from the date of acquisition (see note 31).

The Rest of Europe reporting segment includes the Republic of Ireland, Hungary, Poland, the Czech Republic, Slovakia and Turkey.

The Asia reporting segment includes Thailand, South Korea, Malaysia, China, Japan and India. It also includes the results of Homever for 2008/9 from the date of acquisition (see note 31).

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly interest-bearing borrowings and taxation related assets/liabilities.

Inter-segment turnover between the geographical areas of business is not material.

Geographical segments

	UK	Rest ofEurope	Asia	US	Total
Year ended 28 February 2009	£m	£m	£m	£m	£m
Continuing operations
Revenue
Sales (excluding VAT) to external customers	38,191	8,862	7,068	206	54,327
Result
Segment operating profit/(loss)	2,540	479	343	(156)	3,206
Share of post-tax profit/(loss) of joint ventures and associates	111	(2)	1	–	110
Net finance costs					(362)
Profit before tax					2,954
Taxation					(788)
Profit for the year					2,166

Reconciliation of operating profit to trading profit

	UK£m	Rest ofEurope£m	Asia£m	US£m	Total£m
Operating profit	2,540	479	343	(156)	3,206
Adjustments for:
(Profit)/loss arising on property-related items	(263)	14	8	5	(236)
IAS 19 Income Statement charge for pensions	410	6	12	–	428
'Normal' cash contributions for pensions	(358)	(3)	(15)	–	(376)
IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods	20	–	7	9	36
IFRS 3 Amortisation charge from intangible assets arising on acquisition	32	–	–	–	32
Trading profit/(loss)	2,381	496	355	(142)	3,090
Trading margin	6.2%	5.6%	5.0%	n/a	5.7%

Notes to the Group financial statements continued

Note 2 Segmental reporting continued

	UK£m	Rest ofEurope£m	Asia£m	US£m	Other/unallocated£m	Total£m
Assets and liabilities
Segment assets	29,913	6,953	6,242	768	2,115	45,991
Investments in joint ventures and associates	49	–	13	–	–	62
Total assets	29,962	6,953	6,255	768	2,115	46,053
Segment liabilities	(13,032)	(1,270)	(1,966)	(98)	(16,692)	(33,058)
Total net assets						12,995
Other segment information
Capital expenditure (including acquisitions through business combinations):
Property, plant and equipment	2,417	852	1,404	305	–	4,978
Investment property	–	48	152	–	–	200
Goodwill and other intangible assets	1,242	15	385	–	–	1,642
Depreciation:
Property, plant and equipment	566	249	176	20	–	1,011
Investment property	–	9	16	–	–	25
Amortisation of intangible assets	131	16	6	–	–	153
Impairment losses recognised in the Group Income Statement	(21)	(41)	(4)	–	–	(66)
Reversal of prior period impairment losses through theGroup Income Statement	21	50	17	–	–	88
Profit/(loss) arising on property-related items	263	(14)	(8)	(5)	–	236
Year ended 23 February 2008		UK£m	Rest ofEurope£m	Asia£m	US£m	Total£m
Continuing operations
Revenue
Sales (excluding VAT) to external customers		34,858	6,872	5,552	16	47,298
Result
Segment operating profit/(loss)		2,164	400	294	(67)	2,791
Share of post-tax profit of joint ventures and associates		75	–	–	–	75
Net finance costs						(63)
Profit before tax						2,803
Taxation						(673)
Profit for the year						2,130

Reconciliation of operating profit to trading profit

	UK£m	Rest ofEurope£m	Asia£m	US£m	Total£m
Operating profit	2,164	400	294	(67)	2,791
Adjustments for:
(Profit)/loss arising on property-related items	(188)	(5)	3	2	(188)
IAS 19 Income Statement charge for pensions	446	5	10	–	461
'Normal' cash contributions for pensions	(328)	(3)	(9)	–	(340)
IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods	18	–	6	3	27
Trading profit/(loss)	2,112	397	304	(62)	2,751
Trading margin	6.1%	5.8%	5.5%	n/a	5.8%

Note 2 Segmental reporting continued

	UK	Rest ofEurope	Asia	US	Other/unallocated	Total
	£m	£m	£m	£m	£m	£m
Assets and liabilities
Segment assets	18,949	6,093	4,247	296	274	29,859
Investments in joint ventures and associates	293	1	11	–	–	305
Total assets	19,242	6,094	4,258	296	274	30,164
Segment liabilities	(6,442)	(1,229)	(1,314)	(72)	(9,205)	(18,262)
Total net assets						11,902
Other segment information
Capital expenditure (including acquisitions through business combinations):
Property, plant and equipment	2,359	696	662	189	–	3,906
Investment property	–	13	37	–	–	50
Goodwill and other intangible assets	219	18	22	–	–	259
Depreciation:
Property, plant and equipment	532	188	136	4	–	860
Investment property	–	9	7	–	–	16
Amortisation of intangible assets	99	12	5	–	–	116
Impairment losses recognised in the Group Income Statement	(48)	(25)	(4)	–	–	(77)
Reversal of prior period impairment losses through theGroup Income Statement	48	36	3	–	–	87
Profit/(loss) arising on property-related items	188	5	(3)	(2)	–	188

Business segments

The Group has two business segments, retailing and financial services.

Year ended 28 February 2009	Retailing£m	FinancialServices£m	Total£m
Revenue	54,164	163	54,327
Segment assets	39,788	6,203	45,991
Segment liabilities	(27,557)	(5,501)	(33,058)
Capital expenditure (including acquisitions through business combinations)	6,537	283	6,820

Year ended 23 February 2008	Retailing£m	FinancialServices£m	Total£m
Revenue	47,298	–	47,298
Segment assets	29,859	–	29,859
Segment liabilities	(18,262)	–	(18,262)
Capital expenditure (including acquisitions through business combinations)	4,215	–	4,215

Note 3 Income and expenses

From continuing operations	2009£m	2008£m
Profit before tax is stated after charging/(crediting) the following:
Profit arising on property-related items	(236)	(188)
Rental income, of which £304m (2008 – £211m) relates to investment properties	(349)	(267)
Direct operating expenses arising on rental earning investment properties	91	54
Costs of inventories recognised as an expense	40,779	35,279
Stock losses	870	700
Depreciation of property, plant and equipment and investment property	1,036	876
Net reversal of impairment of property, plant and equipment and impairment of investment property	(22)	(10)
Amortisation of internally-generated development intangible assets	88	87
Amortisation of other intangibles	65	29
Operating lease expenses(a)	738	520

(a) Operating lease expenses include £81m (2008 – £88m) for hire of plant and machinery.

Notes to the Group financial statements continued

Note 3 Income and expenses continued

During the year, the Group (including its overseas subsidiaries) obtained the following services from the Group's auditor, PricewaterhouseCoopers LLP, and network firms:

	2009£m	2008£m
Audit services
Fees payable to the Company's auditor for the audit of the Parent Company and Group financial statements	0.6	0.6
Non-audit services
Fees payable to the Company's auditor and network firms for other services:
the audit of the accounts of the Company's subsidiaries pursuant to legislation	3.1	2.5
other services pursuant to such legislation	0.1	0.1
other services relating to taxation	0.8	1.2
other services relating to corporate finance transactions	1.3	0.3
all other services	0.6	0.3
Total auditor remuneration	6.5	5.0

In addition to the amounts shown above, the auditors received fees of £0.1m (2008 – £0.1m) for the audit of the main Group pension scheme.

Note 4 Employment costs, including Directors' remuneration

	2009£m	2008£m
Wages and salaries	4,707	4,246
Social security costs	410	349
Post-employment benefits (note 28)	439	470
Share-based payments expense (note 27)	242	228
	5,798	5,293

The average number of employees by geographical segment during the year was:

	2009	Averagenumber ofemployees2008*	2009	Averagenumberof full-timeequivalents2008*
UK	286,392	282,199	194,419	193,187
Rest of Europe	86,760	83,705	78,914	77,267
Asia	92,773	77,554	88,099	74,570
US	2,583	669	2,583	730
Total	468,508	444,127	364,015	345,754

* The comparatives have been restated to reflect the US as a separate segment. In 2007/8, the US employees were included in the UK reporting segment.

Note 5 Finance income and costs

	2009£m	2008£m
Finance income
Bank interest receivable and similar income on cash and cash equivalents	91	91
Net pension finance income (note 28)	25	47
Total finance income (on historical cost basis)	116	138
IAS 32 and IAS 39 'Financial Instruments' – Fair value remeasurements	–	49
Total finance income	116	187

Finance costs
Interest payable on short-term bank loans and overdrafts repayable within five years	(152)	(47)
Finance charges payable under finance leases and hire purchase contracts	(13)	(13)
7.5% 258m GBP MTN 2007	–	(8)
6% 125m GBP MTN 2008	(2)	(7)
5.25% 500m EUR MTN 2008	(4)	(18)
5.125% 192m GBP MTN 2009	(10)	(10)
6.625% 150m GBP MTN 2010	(10)	(10)
4.75% 750m EUR MTN 2010	(26)	(25)
3.875% 500m EUR MTN 2011	(14)	(13)
5.625% 1,500m EUR MTN 2012	(35)	–
5% 600m GBP MTN 2014	(1)	–
5.125% 600m EUR MTN 2015	(1)	–
4% RPI GBP MTN 2016(a)	(23)	(20)
5.875% 1,500m EUR MTN 2016	(33)	–
5.5% 850m USD Bond 2017	(23)	(12)
5.5% 350m GBP MTN 2019	(20)	(19)
6.125% 900m GBP MTN 2022	(1)	–
5% 515m GBP MTN 2023	(21)	(18)
3.322% LPI GBP MTN 2025(b)	(20)	(19)
6% 200m GBP MTN 2029	(12)	(12)
5.5% 200m GBP MTN 2033	(11)	(11)
1.982% RPI GBP MTN 2036(c)	(14)	(11)
6.15% 1,150m USD Bond 2037	(35)	(18)
5% 300m GBP MTN 2042	(15)	(15)
5.125% 600m EUR MTN 2047	(21)	(21)
5.2% 500m GBP MTN 2057	(26)	(13)
Other MTNs	(9)	(13)
Capitalised interest	152	103
Total finance costs (on historical cost basis)	(400)	(250)
IAS 32 and IAS 39 'Financial Instruments' – Fair value remeasurements	(78)	–
Total finance costs	(478)	(250)

(a) Interest payable on the 4% RPI GBP MTN 2016 includes £13m (2008 – £10m) of Retail Price Index (RPI) related amortisation. (b) Interest payable on the 3.322% LPI GBP MTN 2025 includes £11m (2008 – £11m) of RPI related amortisation.

Finance costs of £30m (2008 – £nil) resulted from hedge ineffectiveness.

Notes to the Group financial statements continued

Note 6 Taxation

Recognised in the Group Income Statement

	2009£m	2008£m
Current tax expense
UK corporation tax	673	853
Foreign tax	88	78
Adjustments in respect of prior years	(164)	(278)
Benefit of tax losses recognised – adjustments in respect of prior years	–	(56)
	597	597
Deferred tax expense
Origination and reversal of temporary differences	119	54
Benefit of tax losses recognised – adjustments in respect of prior years	–	28
Adjustments in respect of prior years	97	63
Change in tax rate	(25)	(69)
	191	76
Total income tax expense	788	673

UK corporation tax is calculated at 28.2% (2008 – 30.0%) of the estimated assessable profit for the year. Taxation in other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

Reconciliation of effective tax charge

	2009£m	2008£m
Profit before tax	2,954	2,803
Effective tax charge at 28.2% (2008 at 30.0%)	(833)	(841)
Effect of:
Non-deductible expenses	(189)	(180)
Differences in overseas taxation rates	111	41
Adjustments in respect of prior years	67	215
Share of results of joint ventures and associates	31	23
Change in tax rate	25	69
Total income tax charge for the year	(788)	(673)
Effective tax rate	26.7%	24.0%

Tax on items charged to equity

	2009£m	2008£m
Current tax credit on:
Foreign exchange movements	199	250
Share-based payments	46	5
	245	255
Deferred tax credit/(charge) on:
Share-based payments	14	(57)
Pensions	176	(75)
	190	(132)
Total tax on items credited to equity (note 30)	435	123

Note 6 Taxation continued

Deferred tax

The following are the major deferred tax assets/(liabilities) recognised by the Group and movements thereon during the current and prior year:

	Acceleratedtaxdepreciation£m	Retirementbenefitobligation£m	Share-basedpayments£m	Short-termtimingdifferences£m	Tax losses£m	IAS 39£m	Otherpre/postIAS 32 and tax temporarydifferences£m	Total£m
At 24 February 2007	(1,019)	284	136	51	24	21	–	(503)
(Charge)/credit to the Group Income Statement	(83)	22	(3)	(2)	(13)	(8)	11	(76)
Charge to equity	–	(75)	(57)	–	–	–	–	(132)
Acquisition of subsidiaries	(18)	–	–	–	–	–	–	(18)
Foreign exchange translation	52	2	–	(24)	1	–	–	31
At 23 February 2008	(1,068)	233	76	25	12	13	11	(698)
(Charge)/credit to the Group Income Statement	(194)	7	(46)	61	1	(8)	(12)	(191)
Credit to equity	–	176	14	–	–	–	–	190
Acquisition of subsidiaries	12	–	–	(42)	–	42	–	12
Foreign exchange translation	3	1	–	(2)	3	–	7	12
At 28 February 2009	(1,247)	417	44	42	16	47	6	(675)

Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes:

	2009£m	2008£m
Deferred tax assets	21	104
Deferred tax liabilities	(696)	(802)
	(675)	(698)

Unrecognised deferred tax assets

Deferred tax assets 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.

	2009£m	2008£m
Deductible temporary differences	12	2
Tax losses	192	38
	204	40

At the Balance Sheet date, the Group has unused trading tax losses of £744m (2008 – £146m) available for offset against future profits. A deferred tax asset has been recognised in respect of £58m (2008 – £9m) of such losses. No deferred tax asset has been recognised in respect of the remaining £686m (2008 – £137m) due to the unpredictability of future profit streams. Included in unrecognised tax losses are losses of £32m (2008 – £39m in 2012) that will expire in 2013 and £647m (2008 – £57m in 2028) that will expire between 2014 and 2029. Other losses will be carried forward indefinitely.

In addition, the Group has UK capital losses of £310m (2008 – £350m).

Notes to the Group financial statements continued

Note 7 Non-current assets classified as held for sale

	2009£m	2008£m
Non-current assets classified as held for sale	398	308

The non-current assets classified as held for sale consist mainly of properties held for sale.

Note 8 Dividends

	2009pence/share	2008pence/share	2009£m	2008£m
Amounts recognised as distributions to equity holders in the year:
Final dividend for the prior financial year	7.70	6.83	603	541
Interim dividend for the current financial year	3.57	3.20	280	251
	11.27	10.03	883	792

Proposed final dividend for the current financial year	8.39	7.70	662	605

The proposed final dividend was approved by the Board of Directors on 20 April 2009 and is subject to the approval of shareholders at the Annual General Meeting. The proposed dividend has not been included as a liability as at 28 February 2009, in accordance with IAS 10 'Events after the balance sheet date'. It will be paid on 10 July 2009 to shareholders who are on the register of members on 1 May 2009.

Note 9 Earnings per share and diluted earnings per share

Basic earnings per share amounts are calculated by dividing the profit attributable to equity holders of the parent by the weighted average number of ordinary shares in issue during the year.

Diluted earnings per share amounts are calculated by dividing the profit attributable to equity holders of the parent by the weighted average number of ordinary shares in issue during the year (adjusted for the effects of potentially dilutive options).

The dilution effect is calculated on the full exercise of all ordinary share options granted by the Group, including performance-based options which the Group considers to have been earned.

All operations are continuing for the years presented.

			2009			2008
		PotentiallydilutiveBasic share options	Diluted		PotentiallydilutiveBasic share options	Diluted
Profit (£m)	2,161	–	2,161	2,124	–	2,124
Weighted average number of shares (millions)	7,859	53	7,912	7,881	102	7,983
Earnings per share (pence)	27.50	(0.19)	27.31	26.95	(0.34)	26.61

Reconciliation of non-GAAP underlying diluted earnings per share

		2009		2008
	£m	pence/share	£m	pence/share
Profit
Earnings from operations	2,161	27.31	2,124	26.61
Adjustments for:
IAS 32 and IAS 39 'Financial Instruments' – Fair value remeasurements	88	1.11	(49)	(0.61)
Total IAS 19 Income Statement charge for pensions	403	5.09	414	5.19
'Normal' cash contributions for pensions	(376)	(4.75)	(340)	(4.26)
IAS 17 'Leases' – impact of annual uplifts in rent and rent-free periods	27	0.34	18	0.22
IFRS 3 Amortisation charge from intangible assets arising on acquisition	32	0.41	–	–
Tax effect of adjustments at the effective rate of tax (2009 – 26.7%; 2008 – 24.0%*)	(47)	(0.59)	(10)	(0.13)
Underlying earnings from operations	2,288	28.92	2,157	27.02

* In 2007/8, agreement was reached with HMRC on settling prior year tax items. Removing the one-off impact of settling prior year tax items with HMRC, the normalised tax rate was 28.9%.

Note 10 Goodwill and other intangible assets

	Internallygenerateddevelopmentcosts£m	Pharmacyandsoftwarelicences£m	Otherintangibleassets£m	Goodwill£m	Total£m
Cost
At 23 February 2008	691	278	48	1,927	2,944
Foreign currency translation	6	7	(4)	205	214
Additions	192	26	2	–	220
Acquisitions through business combinations	–	–	270	1,152	1,422
Reclassification across categories	(2)	–	2	–	–
Disposals	(8)	(1)	–	(1)	(10)
At 28 February 2009	879	310	318	3,283	4,790
Accumulated amortisation and impairment losses
At 23 February 2008	340	163	7	98	608
Foreign currency translation	–	4	–	–	4
Amortisation for the year	88	31	34	–	153
Reclassification across categories	(1)	–	1	–	–
Disposals	(1)	(1)	–	–	(2)
At 28 February 2009	426	197	42	98	763
Net carrying value
At 28 February 2009	453	113	276	3,185	4,027
At 23 February 2008	351	115	41	1,829	2,336
Cost
At 24 February 2007	583	233	39	1,684	2,539
Foreign currency translation	2	18	–	151	171
Additions	128	29	2	22	181
Acquisitions through business combinations	–	–	8	70	78
Reclassification across categories	1	1	(1)	–	1
Disposals	(23)	(3)	–	–	(26)
At 23 February 2008	691	278	48	1,927	2,944
Accumulated amortisation and impairment losses
At 24 February 2007	263	128	5	98	494
Foreign currency translation	–	9	–	–	9
Amortisation for the year	87	27	2	–	116
Reclassification across categories	1	–	–	–	1
Disposals	(11)	(1)	–	–	(12)
At 23 February 2008	340	163	7	98	608
Net carrying value
At 23 February 2008	351	115	41	1,829	2,336
At 24 February 2007	320	105	34	1,586	2,045

There are no intangible assets, other than goodwill, with indefinite useful lives.

Notes to the Group financial statements continued

Note 10 Goodwill and other intangible assets continued

Impairment of goodwill

Recoverable amounts for cash-generating units are based on the higher of value in use and fair value less costs to sell. In 2008/9, recoverable amounts are based on value in use. Value in use is calculated from cash flow projections for five years using data from the Group's latest internal forecasts, the results of which are reviewed by the Board. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimate discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. Changes in selling prices and direct costs are based on past experience and expectations of future changes in the market. Given the current economic climate, a sensitivity analysis has been performed in assessing the recoverable amounts of goodwill. In the case of Japan, it is reasonably possible that a change in key assumptions would cause the goodwill to exceed its value in use. At 28 February 2009, there was headroom of £8m, incorporating a long-term growth rate of 1.5% and a pre-tax discount rate of 7.3% as key assumptions. A 0.2% reduction in the long-term growth rate or a 0.2% increase in the discount rate would cause goodwill to exceed its value in use. EBITDA margin is also assumed to increase in 2009/10 from 2008/9, where a 2.9% decrease in the forecast margin for 2009/10 would also cause goodwill to exceed its value in use. For Poland, with headroom of £84m and assuming an 11.3% pre-tax discount rate, a 0.4% increase in the discount rate would cause goodwill to exceed its value in use.

The forecasts are extrapolated beyond five years based on estimated long-term average growth rates of generally 2%-10% (2008: 3%-4%).

The pre-tax discount rates used to calculate value in use range from 7%-24% (2008: 8%-24%). On a post-tax basis, the discount rates ranged from 5%-19% (2008: 5%-20%). These discount rates are derived from the Group's post-tax weighted average cost of capital as adjusted for the specific risks relating to each geographical region.

In February 2009 and 2008 impairment reviews were performed by comparing the carrying value of goodwill with the recoverable amount of the cash-generating units to which goodwill has been allocated. Management determined that there has been no impairment.

The components of goodwill are as follows:

	2009£m	2008£m
UK	616	571
Tesco Personal Finance Group Limited	767	–
Thailand	153	124
South Korea	378	48
Japan	196	129
China	540	376
Malaysia	76	65
Poland	354	394
Czech Republic	47	44
Turkey	53	54
Other	5	24
	3,185	1,829

Note 11 Property, plant and equipment

	Land andbuildings£m	Other(a)£m	Total£m
Cost
At 23 February 2008	19,210	6,340	25,550
Foreign currency translation	434	191	625
Additions(b)	3,345	1,013	4,358
Acquisitions through business combinations	586	34	620
Reclassification across categories	(305)	45	(260)
Classified as held for sale	(74)	(8)	(82)
	(847)	(120)	(967)
Disposals
At 28 February 2009	22,349	7,495	29,844
Accumulated depreciation and impairment lossesAt 23 February 2008	2,280	3,483	5,763
Foreign currency translation	55	103	158
Charge for the year	352	659	1,011
Reclassification across categories	(5)	–
Classified as held for sale	18	(3)	15
Disposals	(128)	(90)	(218)
Impairment losses	56	–	56
Reversal of impairment losses	(88)	–	(5)(88)

Net carrying value(c)(d)(e)
At 28 February 2009	19,809	3,343	23,152
At 23 February 2008	16,930	2,857	19,787

Capital work in progress included above(f)

At 28 February 2009 1,375 159 1,534

(a) Other assets consist of plant, equipment, fixtures and fittings and motor vehicles.

(b) Includes £152m (2008 – £103m) in respect of interest capitalised, principally relating to land and building assets. The capitalisation rate used to determine the amount of finance costs capitalised during the year was 5.1% (2008 – 5.1%). Interest capitalised is deducted in determining taxable profit in the year in which it is incurred.

(ii) Assets held under finance leases which are analysed below:

		2009		2008
	Land andbuildings£m	Other(a)£m	Land andbuildings£m	Other(a)£m
Cost	121	578	96	723
Accumulated depreciationand impairment losses	(22)	(390)	(20)	(441)
Net carrying value	99	188	76	282

These assets are pledged as security for the finance lease liabilities.

(d) The net carrying value of land and buildings comprises:

	2009£m	2008£m
Freehold	17,332	15,209
Long leasehold – 50 years or more	1,450	892
Short leasehold – less than 50 years	1,027	829
Net carrying value	19,809	16,930

(e) Carrying value of land and buildings includes £4m (2008 – £6m) relating to the

prepayment of lease premiums. (f) Capital work in progress does not include land.

Notes to the Group financial statements continued

Note 11 Property, plant and equipment continued

	Land andbuildings£m	Other(a)£m	Total£m
Cost
At 24 February 2007	16,540	5,389	21,929
Foreign currency translation	545	231	776
Additions(b)	2,802	925	3,727
Acquisitions through business combinations	153	26	179
Reclassification across categories	(50)	(95)	(145)
Classified as held for sale	(295)	(5)	(300)
Disposals	(485)	(131)	(616)
At 23 February 2008	19,210	6,340	25,550
Accumulated depreciation and impairment losses
At 24 February 2007	1,942	3,011	4,953
Foreign currency translation	52	117	169
Charge for the year	353	507	860
Reclassification across categories	34	(40)	(6)
Classified as held for sale	(44)	(1)	(45)
Disposals	(47)	(111)	(158)
Impairment losses	77	–	77
Reversal of impairment losses	(87)	–	(87)
At 23 February 2008	2,280	3,483	5,763
Net carrying value(c)(d)(e)
At 23 February 2008	16,930	2,857	19,787
At 24 February 2007	14,598	2,378	16,976
Capital work in progress included above(f)
At 23 February 2008	1,058	112	1,170

Impairment of property, plant and equipment

Recoverable amounts for cash-generating units are based on value in use, which is calculated from cash flow projections for five years using data from the Group's latest internal forecasts, the results of which are reviewed by the Board. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimate discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. Changes in selling prices and direct costs are based on past experience and expectations of future changes in the market.

The forecasts are extrapolated beyond five years based on estimated long-term growth rates of generally 2%-10% (2008: 3%-4%).

The pre-tax discount rates used to calculate value in use range from 7%-24% (2008: 8%-24%) depending on the specific conditions in which each store operates. These discount rates are derived from the Group's post-tax weighted average cost of capital.

Note 11 Property, plant and equipment continued

The following amounts have been (charged)/credited to operating costs in the Group Income Statement during the current and prior year:

	2009£m	2008£m
Impairment losses
UK	(21)	(48)
Rest of Europe	(31)	(25)
Asia	(4)	(4)
	(56)	(77)
Reversal of impairment losses
UK	21	48
Rest of Europe	50	36
Asia	17	3
	88	87
Net reversal of impairment losses	32	10

The impairment losses relate to stores whose recoverable amounts (either value in use or fair value less costs to sell) do not exceed the asset carrying values. In all cases, impairment losses arose due to stores performing below forecasted trading levels.

The reversal of previous impairment losses arose principally due to improvements in stores' performances over the last year which increased the net present value of future cash flows.

Note 12 Investment property

	2009£m	2008£m
Cost
At beginning of year	1,190	906
Foreign currency translation	24	93
Additions	114	50
Acquisitions through business combinations	86	–
Transfers	260	144
Classified as held for sale	(10)	–
Disposals	(4)	(3)
At end of year	1,660	1,190
Accumulated depreciation and impairment losses

At beginning of year	78	50
Foreign currency translation	3	7
Charge for the period	25	16
Transfers	5	5
Impairment losses	10	–
At end of year	121	78
Net carrying value	1,539	1,112

The net carrying value at 24 February 2007 was £856m.

The following amounts have been charged to operating costs in the Group Income Statement during the current and prior year:

	2009£m	2008£m
Impairment losses
Rest of Europe	(10)	–
Net impairment losses	(10)	–

The impairment losses relate to malls whose recoverable amounts (either value in use or fair value less costs to sell) do not exceed the asset carrying values. In all cases, impairment losses arose due to the malls performing below forecasted trading levels.

The estimated fair value of the Group's investment property is £3,196m (2008 – £2,265m). This fair value has been determined by applying an appropriate rental yield to the rentals earned by the investment property. A valuation has not been performed by an independent valuer.

Notes to the Group financial statements continued

Note 13 Group entities

Significant subsidiaries

The Group consolidates its subsidiary undertakings; the principal subsidiaries are:

	Business activity	Share of issued ordinary sharecapital, and voting rights	Country ofincorporation
Tesco Stores Limited*	Retail	100%	England
One Stop Stores Limited	Retail	100%	England
Tesco Ireland Limited*	Retail	100%	Republic of Ireland
Tesco-Global Stores Privately Held Co. Limited*	Retail	99%	Hungary
Tesco Polska Sp. z o.o.*	Retail	100%	Poland
Tesco Stores Cˇ R a.s.*	Retail	100%	Czech Republic
Tesco Stores S R a.s.*	Retail	100%	Slovakia
Tesco Kipa Kitle Paza rlama Ticaret ve Gide Sanai A.S¸.	Retail	93%	Turkey
Samsung Tesco Co. Limited*	Retail	94%	South Korea
Homever Tesco Co. Limited*	Retail	100%	South Korea
Ek-Chai Distribution System Co. Limited*	Retail	86%(a)	Thailand
Tesco Stores Malaysia Sdn Bhd*	Retail	70%	Malaysia
Tesco Japan Co. Limited*	Retail	100%	Japan
Shanghai Kancheng Storage Co. Limited*	Retail	90%	Republic of China
Dobbies Garden Centres PLC*	Retail	100%	Scotland
Fresh & Easy Neighborhood Market Inc*	Retail	100%	USA
Tesco Personal Finance Group Limited	Financial Services	100%	Scotland
Tesco Distribution Limited*	Distribution	100%	England
Tesco Property Holdings Limited*	Property	100%	England
Tesco International Sourcing Limited*	Purchasing	100%	Hong Kong
dunnhumby Limited*	Data Analysis	84%	England
Tesco Insurance Limited*	Self-insurance	100%	Guernsey
Valiant Insurance Company Limited*	Self-insurance	100%	Republic of Ireland

* Held by an intermediate subsidiary.

(a) The Group has 86% of voting rights and 39% of issued ordinary share capital in Ek-Chai Distribution System Co. Limited.

All principal subsidiary undertakings operate in their country of incorporation.

The accounting period ends of the subsidiary undertakings consolidated in these financial statements are on or around 28 February 2009.

A full list of the Group's subsidiary undertakings will be annexed to the next Annual Return filed at Companies House.

There are no significant restrictions on the ability of subsidiary undertakings to transfer funds to the parent, other than those imposed by the Companies Act 1985.

Interests in joint ventures and associates

The Group uses the equity method of accounting for joint ventures and associates. The following table shows the aggregate movement in the Group's investment in joint ventures and associates:

	Joint ventures£m	Associates£m	Total£m
At 24 February 2007	304	10	314
Additions	8	–	8
Share of profit of joint ventures and associates	74	1	75
Income received from joint ventures and associates	(87)	(1)	(88)
Transferred to investment in subsidiary undertakings	(4)	–	(4)
At 23 February 2008	295	10	305
Foreign currency translation	4	–	4
Share of profit of joint ventures and associates	106	4	110
Income received from joint ventures and associates	(68)	(1)	(69)
Transferred to amounts owed by subsidiary undertakings	(37)	–	(37)
Transferred to investment in subsidiary undertakings	(251)	–	(251)
At 28 February 2009	49	13	62

Note 13 Group entities continued

Transferred to investment in subsidiary undertakings

During the year ended 28 February 2009, the Group acquired the remaining 50% of the share capital of Tesco Personal Finance Group Limited, previously a joint venture, making the company a wholly-owned subsidiary entity which has been consolidated within the Group results from the date of acquisition onwards (see note 31).

During the year ended 23 February 2008, the Group purchased additional share capital in Nutri Centres Limited, making the company a wholly-owned subsidiary entity which has been consolidated within the Group results from the date of acquisition onwards.

Significant joint ventures

The Group's principal joint ventures are:

		Share of issued sharecapital, loan capital and	Country of incorporationand principal country
	Business activity	debt securities	of operation
Tesco Mobile Limited†	Telecommunications	50%	England
Shopping Centres Limited	Property Investment	50%	England
BLT Properties Limited	Property Investment	50%	England
Tesco British Land Property Partnership†	Property Investment	50%	England
Tesco Red Limited Partnership†	Property Investment	50%	England
Tesco Aqua Limited Partnership†	Property Investment	50%	England
Tesco Jade Limited Partnership†	Property Investment	50%	England
Tesco Coral Limited Partnership†	Property Investment	50%	England
Arena (Jersey) Management Limited†	Property Investment	50%	Jersey
The Tesco Property (No. 2) Limited Partnership†	Property Investment	50%	Jersey

† Held by an intermediate subsidiary.

The accounting period ends of the joint ventures consolidated in these financial statements range from 31 December 2008 to 28 February 2009. Accounting period end dates different from those of the Group arise for commercial reasons and depend upon the requirements of the joint venture partner as well as those of the Group.

The share of the assets, liabilities, revenue and profit of the joint ventures, which are included in the consolidated financial statements, are as follows:

	2009£m	2008£m
Non-current assets	1,637	1,411
Current assets	281	4,277
Current liabilities	(426)	(3,888)
Non-current liabilities	(1,458)	(1,513)
Goodwill	1	1
Cumulative unrecognised losses	14	7
	49	295
Revenue	549	482
Expenses	(443)	(408)
Profit for the year	106	74

The unrecognised share of losses made by joint ventures in the year to 28 February 2009 was £7m (2008 – £nil).

Notes to the Group financial statements continued

Note 13 Group entities continued

Associates

At the Balance Sheet date, the Group's principal associate is:

	Business activity	Share of issued capital,loan capital and debtsecurities	Country of incorporationand principal countryof operation
Greenergy International Limited†	Fuel Supplier	21%	England

† Held by an intermediate subsidiary.

Although the Group only holds a 21.3% non-voting shareholding in Greenergy International Limited it is treated as an associate as the Board of Greenergy International Limited requires the consent of Tesco on certain reserve matters as specified in the company's Articles of Association.

The share of the assets, liabilities, revenue and profit of the Group's associates, which are included in the consolidated financial statements, are as follows:

	2009£m	2008£m
Assets	163	115
Liabilities	(152)	(107)
Goodwill	2	2
	13	10
Revenue	540	325
Profit for the year	4	1

The accounting period ends of the associates consolidated in these financial statements range from 31 December 2008 to 31 January 2009. The accounting period end dates of the associates are different from those of the Group as they also depend upon the requirements of the parent companies of those entities.

There are no significant restrictions on the ability of associated undertakings to transfer funds to the parent, other than those imposed by the Companies Act 1985.

Note 14 Other investments

	2009£m	2008£m
Equity investment	259	–
Available-for-sale financial assets	–	4
	259	4

The equity investment comprises an interest free subordinated loan made by Tesco Personal Finance Group Limited to Direct Line Group Limited. This loan has been classed as an equity investment as there is no interest receivable and no fixed repayment date.

No impairment charges were recognised on the loan since the date of acquisition.

Available-for-sale financial assets consist of ordinary shares, and therefore have no fixed maturity date or coupon rate.

The fair value of the unlisted available-for-sale investments has been estimated using a valuation technique based on assumptions that are not supported by observable market prices or rates. The fair value of the listed available-for-sale investments is based on quoted market prices at the Balance Sheet date.

The following table shows the aggregate movement in the Group's other investments during the year:

	2009£m	2008£m
At beginning of year	4	8
Acquisitions through business combinations	259	–
Revaluation through equity	–	(4)
IAS 32 and IAS 39 'Financial Instruments' – Fair value remeasurements	(4)	–
At end of year	259	4

Note 15 Inventories

	2009£m	2008£m
Goods held for resale	2,656	2,420
Development properties	13	10
	2,669	2,430

Note 16 Trade and other receivables

	2009£m	2008£m
Prepayments and accrued income	419	298
Finance lease receivables (note 37)	–	5
Other receivables	1,103	796
Amounts owed by joint ventures and associates (note 32)	276	212
	1,798	1,311

Included within trade and other receivables are the following amounts receivable after more than one year:

	2009£m	2008£m
Prepayments and accrued income	14	12
Other receivables	275	160
Amounts owed by joint ventures and associates (note 32)	262	173
	551	345

Trade and other receivables are generally non-interest bearing. Credit terms vary by geography and the nature of the debt and can be from 7 to 60 days.

Trade receivables are recorded at amortised cost, reduced by estimated allowances for doubtful debts.

Provision for impairment of receivables

	£m
At 24 February 2007	(34)
Foreign currency translation	(3)
Charge for the year	(15)
Uncollectible amounts written off	14
Recoveries of amounts previously written off	9
At 23 February 2008	(29)
Foreign currency translation	(2)
Charge for the year	(21)
Uncollectible amounts written off	3
Recoveries of amounts previously written off	5
At 28 February 2009	(44)

As at 28 February 2009, trade and other receivables of £45m (2008 – £31m) were past due and impaired. The amount of the provision was £44m (2008 – £29m). The ageing analysis of these receivables is as follows:

	2009£m	2008£m
Up to 3 months past due	3	3
3 to 6 months past due	3	3
Over 6 months past due	39	25
	45	31

Notes to the Group financial statements continued

Note 16 Trade and other receivables continued

As at 28 February 2009, trade and other receivables of £97m (2008 – £103m) were past due but not impaired. The ageing analysis of these receivables is as follows:

	2009£m	2008£m
Up to 3 months past due	71	79
3 to 6 months past due	15	13
Over 6 months past due	11	11
	97	103

No receivables have been renegotiated in the current or prior year.

Note 17 Loans and advances to customers

Tesco Personal Finance Group Limited has loans and advances to customers.

	2009£m	2008£m
Current	1,918	–
Non-current	1,470	–
	3,388	–

The maturity of these loans and advances is as follows:

	2009£m	2008£m
Repayable on demand or at short notice	1	–
Within three months	2,021	–
Greater than three months but less than one year	38	–
Greater than one year but less than five years	1,061	–
After five years	517	–
	3,638	–
Provision for impairment of loans and advances	(250)	–
	3,388	–

The securitised amount against loans and advances is £1,468m and the fair value of these are not materially different to the amortised cost value at which they are disclosed.

Provision for impairment of loans and advances

	£m
Acquisition through business combination*	(229)
Charge for the period	(130)
Uncollectible amounts written off	109
Recoveries of amounts previously written off	(7)
Unwind of discount	7
At 28 February 2009	(250)

* Tesco Personal Finance Group Limited was acquired on 19 December 2008.

At 28 February 2009, Tesco Personal Finance Group Limited's non-interest bearing loans were £291m. Loan impairment provisions of £250m were held against these loans. In the period between the date of acquisition and year end, the gross income not recognised but which would have been recognised under the original terms of non-interest bearing loans was £25m.

Note 17 Loans and advances to customers continued

At 28 February 2009, loans and advances to customers of £82m were past due but not impaired. The ageing analysis of these loans and advances is as follows:

	2009£m	2008£m
Up to one month past due	58	–
One to three months past due	15	–
Over three months past due	9	–
	82	–

No loans have been renegotiated between the date of acquisition and the year end that would otherwise have been past due or impaired.

Note 18 Loans and advances to banks and other financial assets

Tesco Personal Finance Group Limited has loans and advances to banks and other financial assets with the following maturity:

	2009£m	2008£m
Within three months	1,509	–
Greater than three months but less than one year (a)	591	–
Greater than one year but less than five years	29	–
	2,129	–

(a) Included within loans and advances to banks and other financial assets are treasury bills of £588m in respect of collateral held with the Bank of England.

There are no loans and advances which are past due and impaired.

Note 19 Cash and cash equivalents

	2009£m	2008£m
Cash at bank and in hand	2,112	1,542
Short-term deposits	1,397	246
	3,509	1,788

Note 20 Trade and other payables

Current

	2009£m	2008£m
Trade payables	4,748	3,936
Other taxation and social security	334	324
Other payables	1,984	1,714
Amounts payable to joint ventures and associates (note 32)	162	116
Accruals and deferred income	1,294	1,187
	8,522	7,277

Non-current

	2009£m	2008£m
Other payables	68	42

Notes to the Group financial statements continued

Note 21 Borrowings

Current
	Par value	Maturityyear	2009£m	2008£m
Bank loans and overdrafts		2009	3,014	1,458
Loan from joint ventures (note 32)		2009	20	10
6% MTN	£125m	2008	–	130
5.25% MTN	€500m	2008	–	392
5.125% MTN	£192m	2009	198	–
1.434% MTN – TPF	£295m	2009	295	–
1.684% MTN – TPF	£89m	2009	89	–
1.418% MTN – TPF	£204m	2009	204	–
Other MTNs	–	–	192	43
Finance leases (note 37)	–	–	47	51
			4,059	2,084

The loan notes issued as part of the securitisation are secured on portfolios comprising variable rate personal credit cards. The maturity date of the notes matches the maturity date of the underlying assets and are repayable within one year from the balance sheet date.

Non-current

	Par value	Maturityyear	2009£m	2008£m
Finance leases (note 37)	–	–	196	215
5.125% MTN	£192m	2009	–	191
6.625% MTN	£150m	2010	154	153
4.75% MTN	€750m	2010	689	592
3.875% MTN	€500m	2011	476	387
5.625% MTN	€1,500m	2012	1,362	–
LIBOR + 1.33% Bond – TPF	£225m	2012	225	–
5% MTN	£600m	2014	592	–
5.125% MTN	€600m	2015	522	–
4% RPI MTN(a)	£263m	2016	268	254
5.875% MTN	€1,500m	2016	1,488	–
5.5% USD Bond	$850m	2017	678	455
5.5% MTN	£350m	2019	351	350
6.125% MTN	£900m	2022	901	–
5% MTN(b)	£515m	2023	515	417
3.322% LPI MTN(c)	£265m	2025	267	255
6% MTN	£200m	2029	216	194
5.5% MTN	£200m	2033	216	192
1.982% RPI MTN(d)	£221m	2036	221	212
6.15% USD Bond	$1,150m	2037	977	604
5% MTN	£300m	2042	306	305
5.125% MTN	€600m	2047	628	451
5.2% MTN	£500m	2057	500	499
Other MTNs	–	–	285	135
Other loans	–	–	358	111
			12,391	5,972

(a) The 4% RPI MTN is redeemable at par, indexed for increases in the Retail Price Index (RPI) over the life of the MTN.

(b) An additional bond issue increased the principal of this MTN from £415m to £515m in 2008/9.

(c) The 3.322% LPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN. The maximum indexation of the principal in any one year is 5%, with a minimum of 0%. (d) The 1.982% RPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN.

Borrowing facilities

The Group has the following undrawn committed facilities available at 28 February 2009, in respect of which all conditions precedent had been met as at that date:

	2009£m	2008£m
Expiring between one and two years	100	–
Expiring in more than two years	2,600	1,600
	2,700	1,600

Note 22 Financial instruments

Derivatives are used for hedging in the management of exposure to market risks. This enables the optimisation of the overall cost of accessing debt capital markets, and mitigates the market risk which would otherwise arise from the maturity and other profiles of assets and liabilities.

Hedging policies using derivative financial instruments are further explained below. Derivatives that are held as hedging instruments are formally designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting purposes as described below.

Finance costs of £30m (2008 – £nil) resulted from hedge ineffectiveness.

Fair value hedges

A gain of £1,197m on hedging instruments was recognised during the year, offset by a loss of £1,227m on hedged items (in 2008, a gain of £261m on hedging instruments was offset by a loss of £261m on hedged items).

Cash flow hedges

Net investment hedges

The Group uses forward foreign currency contracts, currency denominated borrowings and currency options to hedge the exposure of a proportion of its non-Sterling denominated assets against changes in value due to changes in foreign exchange rates.

The Group has a Chinese Yuan denominated liability relating to the future purchase of the minority shareholding of its subsidiary, Hymall. This liability has been designated as a net investment hedge of a proportion of the assets of Hymall.

Gains and losses accumulated in equity are included in the Group Income Statement on disposal of the overseas operation.

Financial instruments not qualifying for hedge accounting

The Group's policy is not to use derivatives for trading purposes; however, some derivatives may not qualify for hedge accounting, or are specifically not designated as a hedge where natural offset is appropriate.

These instruments include caps, collars, interest rate swaps and forward foreign currency contracts. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the Group Income Statement within finance income or costs.

The fair value of derivative financial instruments have been disclosed in the Group Balance Sheet as follows:

		2009		2008
	Asset£m	Liability£m	Asset£m	Liability£m
Current	382	(525)	97	(443)
Non-current	1,478	(302)	216	(322)
	1,860	(827)	313	(765)

Notes to the Group financial statements continued

Note 22 Financial instruments continued

The fair value and notional amounts of derivatives analysed by hedge type are as follows:

				2009				2008
		Asset		Liability		Asset		Liability
	Fair value£m	Notional£m	Fair value£m	Notional£m	Fair value£m	Notional£m	Fair value£m	Notional£m
Fair value hedges
Interest rate swaps and similar instruments	6	307	(67)	2,123	2	125	(80)	657
Cross currency swaps	1,445	4,293	(40)	996	252	2,795	–	–
Cash flow hedges
Interest rate swaps and similar instruments	–	100	(66)	400	–	–	–	–
Cross currency swaps	1	21	–	–	–	–	(1)	17
Forward foreign currency contracts	101	1,762	(24)	348	19	811	(9)	387
Net investment hedges
Forward foreign currency contracts	92	2,623	(194)	2,767	2	289	(218)	2,328
Future purchases of minority interests	–	–	(167)	–	–	–	(197)	–
Derivatives not in a formal hedge relationship
Interest rate swaps and similar instruments	1	774	(35)	3,740	6	3,668	(2)	189
Cross currency swaps	25	411	(47)	639	–	–	(16)	347
Forward foreign currency contracts	189	2,784	(154)	2,767	32	1,641	(207)	2,816
Future purchases of minority interests	–	–	(33)	–	–	–	(35)	–
Total	1,860	13,075	(827)	13,780	313	9,329	(765)	6,741

Carrying and fair value of financial assets and liabilities at financial year ending:

		2009		2008
	Carrying	Fair	Carrying	Fair
	value£m	value£m	value£m	value£m
Assets
Finance leases (Group as lessor – note 37)	–	–	5	5
Cash and cash equivalents	3,509	3,509	1,788	1,788
Loans and advances to customers – TPF	3,388	3,388	–	–
Loans and advances to banks and other financial assets – TPF	2,129	2,129	–	–
Short-term investments	1,233	1,233	360	360
Other investments – TPF	259	259	–	–
Joint venture loan receivables (note 32)	262	262	173	173
Derivative financial assets:
Interest rate swaps and similar instruments	7	7	8	8
Cross currency swaps	1,471	1,471	252	252
Forward foreign currency contracts	382	382	53	53
Total financial assets	12,640	12,640	2,639	2,639

Liabilities
Short-term borrowings:
Amortised cost	(3,779)	(3,778)	(1,511)	(1,516)
Bonds in fair value hedge relationships	(233)	(223)	(522)	(502)
Long-term borrowings:
Amortised cost	(5,248)	(5,028)	(2,269)	(2,138)
Bonds in fair value hedge relationships	(6,947)	(6,147)	(3,488)	(3,261)
Finance leases (Group as lessee – note 37)	(243)	(243)	(266)	(266)
Customer deposits – TPF	(4,538)	(4,538)	–	–
Deposits by banks – TPF	(24)	(24)	–	–
Derivative and other financial liabilities:
Interest rate swaps and similar instruments	(168)	(168)	(81)	(81)
Cross currency swaps	(87)	(87)	(18)	(18)
Forward foreign currency contracts	(372)	(372)	(434)	(434)
Future purchases of minority interests	(200)	(200)	(232)	(232)
Total financial liabilities	(21,839)	(20,808)	(8,821)	(8,448)
Total	(9,199)	(8,168)	(6,182)	(5,809)

Note 22 Financial instruments continued

Financial assets and liabilities by category

The accounting classifications of each class of financial assets and liabilities as at 28 February 2009 and 23 February 2008 are as follows:

At 28 February 2009	Loans andreceivables/other financialliabilities£m	Fair valuethroughprofit or loss£m	Total£m
Cash and cash equivalents	3,509	–	3,509
Loans and advances to customers – TPF	3,388	–	3,388
Loans and advances to banks and other financial assets – TPF	1,541	588	2,129
Short-term investments	1,233	–	1,233
Other investments – TPF	259	–	259
Joint venture loan receivables (note 32)	262	–	262
Customer deposits – TPF	(4,538)	–	(4,538)
Deposits by banks – TPF	(24)	–	(24)
Short-term borrowings	(4,012)	–	(4,012)
Long-term borrowings	(12,195)	–	(12,195)
Finance leases (Group as lessee – note 37)	(243)	–	(243)
Derivative financial instruments:
Interest rate swaps and similar instruments	–	(161)	(161)
Cross currency swaps	–	1,384	1,384
Forward foreign currency contracts	–	10	10
Future purchases of minority interests	–	(200)	(200)
	(10,820)	1,621	(9,199)

At 23 February 2008	Loans andreceivables/other financialliabilities£m	Fair valuethroughprofit or loss£m	Total£m
Finance leases (Group as lessor – note 37)	5	–	5
Cash and cash equivalents	1,788	–	1,788
Short-term investments	360	–	360
Joint venture loan receivables (note 32)	173	–	173
Short-term borrowings	(2,033)	–	(2,033)
Long-term borrowings	(5,757)	–	(5,757)
Finance leases (Group as lessee – note 37)	(266)	–	(266)
Derivative financial instruments:
Interest rate swaps and similar instruments	–	(73)	(73)
Cross currency swaps	–	234	234
Forward foreign currency contracts	–	(381)	(381)
Future purchases of minority interests	–	(232)	(232)
	(5,730)	(452)	(6,182)

Notes to the Group financial statements continued

Note 23 Financial risk factors

The main financial risks faced by the Group relate to fluctuations in interest and foreign exchange rates, the risk of default by counterparties to financial transactions, and the availability of funds to meet business needs. These risks are managed as described below. The Group Balance Sheet position at 28 February 2009 is representative of the position throughout the year, including the impact of acquisitions during the year.

Interest rate risk

For interest rate risk relating to Tesco Personal Finance Group Limited (TPF) please refer to the separate section on TPF financial risk factors.

During 2009 and 2008, net debt including TPF was managed using derivative instruments to hedge interest rate risk as follows:

		2009		2008
	Fixed£m	Floating£m	Total£m	Fixed£m	Floating£m	Total£m
Cash and cash equivalents	–	3,509	3,509	–	1,788	1,788
Loans and advances to customers – TPF	3,388	–	3,388	–	–	–
Loans and advances to banks and other financial assets – TPF	–	2,129	2,129	–	–	–
Short-term investments	–	1,233	1,233	–	360	360
Other investments – TPF	259	–	259	–	–	–
Joint venture loan receivables	–	262	262	–	173	173
Finance leases	(84)	(159)	(243)	(73)	(188)	(261)
Bank and other borrowings	(11,540)	(4,667)	(16,207)	(5,745)	(2,045)	(7,790)
Customer deposits – TPF	–	(4,538)	(4,538)	–	–	–
Deposits by banks – TPF	–	(24)	(24)	–	–	–
Future purchases of minority interests	(200)	–	(200)	(232)	–	(232)
Derivative effect:
Interest rate swaps	(415)	415	–	752	(752)	–
Cross currency swaps	4,524	(4,524)	–	2,778	(2,778)	–
Caps and collars	774	(774)	–	(876)	876	–
Total	(3,294)	(7,138)	(10,432)	(3,396)	(2,566)	(5,962)

Credit risk

The counterparty exposure under derivative contracts is £1,860m (2008 – £313m). The Group policy is to transact derivatives only with counterparties rated at least A1 by Moody's.

For credit risk relating to TPF please refer to the separate section on TPF financial risk factors.

Liquidity risk

Liquidity risk is managed by short-term and long-term cash flow forecasts. In addition, the Group has committed facility agreements for £2.7bn (2008 – £1.6bn), which mature between 2010 and 2014.

The Group has a European Medium Term Note programme of £15bn, of which £11bn was in issue at 28 February 2009 (2008 – £4.9bn), plus a Euro Commercial Paper programme of £2bn, of which £1.6bn was in issue at 28 February 2009 (2008 – £0.6bn), and a US Commercial Paper programme of $4bn, none of which was in issue at 28 February 2009 (2008 – £nil).

For liquidity risk relating to TPF please refer to the separate section on TPF financial risk factors.

The following is an analysis of the undiscounted contractual cash flows payable under financial liabilities and derivatives.

The undiscounted cash flows will differ from both the carrying values and fair value. Floating rate interest is estimated using the prevailing rate at the Balance Sheet date. Cash flows in foreign currencies are translated using spot rates at the Balance Sheet date. For index linked liabilities, inflation is estimated at 3% for the life of the liability.

Note 23 Financial risk factors continued

At 28 February 2009	Duewithin1 year£m	Duebetween1 and 2years£m	Duebetween2 and 3years£m	Duebetween3 and 4years£m	Duebetween4 and 5years£m	Duebeyond5 years£m
Non derivative financial liabilities
Bank and other borrowings	(3,616)	(971)	(873)	(1,931)	(225)	(7,943)
Interest payments on borrowings	(560)	(549)	(514)	(486)	(411)	(5,045)
Customer deposits – TPF	(4,538)	–	–	–	–	–
Deposits by banks – TPF	(24)	–	–	–	–	–
Finance leases	(55)	(51)	(48)	(32)	(9)	(172)
Trade and other payables	(8,522)	(34)	(5)	(2)	(4)	(23)
Derivative and other financial liabilities
Net settled derivative contracts – receipts	104	17	9	5	4	1
Net settled derivative contracts – payments	(245)	(30)	(19)	(23)	(13)	(112)
Gross settled derivative contracts – receipts	4,657	1,186	1,247	404	708	5,707
Gross settled derivative contracts – payments	(4,577)	(957)	(1,053)	(313)	(671)	(4,652)
Future purchases of minority interests	(93)	–	(87)	(20)	–	–
Total	(17,469)	(1,389)	(1,343)	(2,398)	(621)	(12,239)
At 23 February 2008	Duewithin1 year£m	Duebetween1 and 2years£m	Duebetween2 and 3years£m	Duebetween3 and 4years£m	Duebetween4 and 5years£m	Duebeyond5 years£m
Non derivative financial liabilities
Bank and other borrowings	(2,018)	(287)	(795)	(398)	(47)	(4,714)
Interest payments on borrowings	(298)	(272)	(229)	(211)	(198)	(4,906)
Finance leases	(62)	(54)	(50)	(46)	(30)	(130)
Trade and other payables	(7,277)	(14)	(13)	(2)	(6)	(7)
Derivative and other financial instruments
Net settled derivative contracts – receipts	7	–	–	–	–	–
Net settled derivative contracts – payments	(230)	(16)	(9)	(9)	(9)	(172)
Gross settled derivative contracts – receipts	2,968	255	705	484	297	3,207
Gross settled derivative contracts – payments	(2,827)	(286)	(677)	(452)	(304)	(3,280)
Future purchases of minority interests	–	(70)	–	(166)	(34)	–
Total	(9,737)	(744)	(1,068)	(800)	(331)	(10,002)

Sensitivity analysis at 28 February 2009

Financial instruments affected by market risk include borrowings, deposits and derivative financial instruments. The following analysis, required by IFRS 7 'Financial Instruments: Disclosures', is intended to illustrate the sensitivity to changes in market variables, being UK interest rates, and foreign exchange risk.

Notes to the Group financial statements continued

Note 23 Financial risk factors continued

Foreign exchange risk

The Group is exposed to foreign exchange risk principally via:

(a) Transactional exposure, from the cost of future purchases of goods for resale, where those purchases are denominated in a currency other than the functional currency of the purchasing company. Transactional exposures that could significantly impact the Group Income Statement are hedged. These exposures are hedged via forward foreign currency contracts which are designated as cash flow hedges. The notional and fair value of these contracts is shown in note 22.
(b) Net investment exposure, from the value of net investments outside the UK. We hedge the majority of our investments in our international subsidiaries via foreign currency transactions and borrowings in matching currencies, which are formally designated as net investment hedges.
(c) Loans to non-UK subsidiaries. These are hedged via foreign currency transactions and borrowings in matching currencies, which are not formally designated as hedges, as gains and losses on hedges and hedged loans will naturally offset.

The impact on Group financial instruments from foreign currency volatility is shown in the sensitivity analysis below.

The analysis excludes the impact of movements in market variables on the carrying value of pension and other post-employment obligations and on the retranslation of overseas net assets as required by IAS 21 'The Effects of Changes in Foreign Exchange Rates'. However it does include the foreign exchange sensitivity resulting from all local entity non-functional currency financial instruments.

It should be noted that the sensitivity analysis reflects the impact on income and equity due to all financial instruments held at the Balance Sheet date. It does not reflect any change in sales or costs that may result from changing interest or exchange rates.

The following assumptions were made in calculating the sensitivity analysis:

the sensitivity of interest payable to movements in interest rates is calculated on the post hedge floating rate net debt exposure with no sensitivity assumed for LPI-linked debt;
changes in the carrying value of derivative financial instruments designated as fair value hedges from movements in interest rates or foreign exchange rates have an immaterial effect on the Group Income Statement and equity due to compensating adjustments in the carrying value of debt;
changes in the carrying value of derivative financial instruments designated as net investment hedges from movements in foreign exchange rates are recorded directly in equity;
changes in the carrying value of derivative financial instruments not designated as hedging instruments only affect the Group Income Statement;
all other changes in the carrying value of derivative financial instruments designated as hedging instruments are fully effective with no impact on the Group Income Statement;
debt with a maturity below one year is floating rate for the interest payable part of the calculation; and
the floating leg of any swap or any floating rate debt is treated as not having any interest rate already set, therefore a change in interest rates affects a full 12-month period for the interest payable portion of the sensitivity calculations.

Using the above assumptions, the following table shows the illustrative effect on the Group Income Statement and equity that would result from changes in UK interest rates, and in exchange rates:

	2009
	Incomegain/(loss)£m	Equitygain/(loss)£m	Incomegain/(loss)£m	Equitygain/(loss)£m
Assets
1% increase in GBP interest rates	(59)	–	(42)	–
25% appreciation of the Euro (2008 – 5%)	(22)	(22)	(5)	(32)
20% appreciation of the South Korean Won (2008 – 5%)	(1)	(222)	–	–
25% appreciation of the US Dollar (2008 – 5%)	(11)	218	(2)	43
25% appreciation of the Thai Baht (2008 – 5%)	–	(1)	–	(1)
25% appreciation of the Czech Koruna (2008 – 10%)	–	(204)	–	(27)
15% appreciation of the Polish Zloty (2008 – 15%)	14	–	1	(102)
20% appreciation of the Slovak Koruna (2008 – 20%)	–	–	2	(87)

Note 23 Financial risk factors continued

Capital risk

To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, buy back shares and cancel them or issue new shares. In April 2006, we outlined our plan to release cash from our property assets, via a sequence of property joint ventures and other transactions, and return significant value to shareholders, either through enhanced dividends or share buy-backs. The target for the value of share buy-backs was increased from £1.5bn to £3.0bn over a five-year period from April 2007. Whilst we continued with the policy at the beginning of 2008/9, we have subsequently used the proceeds from property divestment to pay down debt, following the two major acquisitions in the second half (Homever and Tesco Personal Finance Group Limited). Early in 2008/9 we purchased and cancelled £100m ordinary shares. In the financial year 2009/10 we expect to continue to use the proceeds from the sale of property to pay down debt.

The policy for debt is to ensure a smooth debt maturity profile with the objective of ensuring continuity of funding. This policy continued during the current year with bonds redeemed of £524m and new bonds issued totalling £4,901m. The Group borrows centrally and locally, using a variety of capital market issues and borrowing facilities to meet the requirements of each local business.

Tesco Personal Finance Group Limited (TPF)

Interest rate risk

Interest rate risk arises where assets and liabilities in TPF's banking activities have different repricing dates. TPF policy seeks to minimise the sensitivity of net interest income to changes in interest rates. Potential exposures to interest rate movements in the medium to long term are measured and controlled through position and sensitivity limits. Short-term exposures are measured and controlled in terms of net interest income sensitivity over 12 months to a 1.5% parallel movement in interest rates. Risk is managed through arm's length cash transactions.

Credit risk

Credit risk is the probability of customers and counterparties failing to meet their obligations to TPF and arises principally from TPF's lending activities but also from other transactions involving on and off-balance sheet instruments. Limits have been established for all counterparties based on their respective credit ratings. The limits and proposed counterparties are reviewed and approved by the Risk Management Committee (RMC) and Board of TPF.

Liquidity risk

Liquidity risk is managed on a consolidated basis within TPF's banking activities and adheres to the liquidity requirements set by the Financial Services Authority (FSA) from time to time. In the UK, the FSA requires TPF to be able to meet its sterling obligations without recourse to the wholesale markets for a period of at least five business days. To meet regulatory requirements a diversified portfolio of high quality liquid and marketable assets is maintained. Cash flow commitments and marketable asset holdings are measured and managed on a daily basis. TPF has credit facilities sufficient to meet all foreseeable outflow requirements as they fall due and its liquidity risk is further mitigated by its well diversified retail deposit base.

Expressed as an annual probability of default, the upper and lower boundaries and the midpoint for each of the asset quality grades are as follows:

				Annual probability of default
Asset quality grade	Minimum%	Midpoint%	Maximum%	S&Pequivalent
AQ1	0.00	0.10		0.20 AAA to BBB
AQ2	0.21	0.40	0.60	BB+ to BB
AQ3	0.61	1.05	1.50	BB- to B+
AQ4	1.51	3.25	5.00	B+ to B
AQ5	5.01	52.50		100.00 B and below

At 28 February 2009	AQ1£m	AQ2£m	AQ3£m	AQ4£m	AQ5£m	Accruingpast due£m	Non-accrual£m	Impairmentprovision£m	Total£m
Assets:
Other investments	259	–	–	–	–	–	–	–	259
Loans and advances to customers	352	652	828	870	563	82	291	(250)	3,388
Loans and advances to banksand other financial assets	2,129	–	–	–	–	–	–	–	2,129
	2,740	652	828	870	563	82	291	(250)	5,776
Commitment	3,103	1,451	744	305	129	–	–	–	5,732
Total off balance sheet	3,103	1,451	744	305	129	–	–	–	5,732

Notes to the Group financial statements continued

Note 23 Financial risk factors continued

Insurance risk

TPF is exposed to insurance risk indirectly through its profit sharing commission arrangement with The Royal Bank of Scotland Group PLC. Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to the expectations at the time of underwriting.

The frequency and severity of claims and the sources of uncertainty for the key classes that TPF is exposed to are as follows:

Motor insurance

Claims experience is quite variable, due to a wide range of factors, but the principal ones are age, sex and driving experience, type and nature of vehicle, use of vehicle and area. There are many sources of uncertainty that will affect TPF's experience under motor insurance including operational risk, reserving risk, premium rates not matching claims inflation rates, the weather, the social, economic and legislative environment and reinsurance failure risk.

Property insurance

Note 24 Customer deposits

	2009£m	2008£m
Customer deposits	4,538	–

Customer deposits are recorded at amortised cost and are repayable on demand.

Note 25 Deposits by banks

The Group has deposits by banks with the following maturity:

	2009£m	2008£m
Within three months	24	–
	24	–

Deposits by banks are recorded at amortised cost.

Note 26 Provisions

	Property
	provisions£m
At 23 February 2008	27
Foreign currency translation	3
Acquisitions through business combinations	59
Amount utilised in the year	(12)
At 28 February 2009	77

The balances are analysed as follows:

	2009£m	2008£m
Current	10	4
Non-current	67	23
	77	27

Note 27 Share-based payments

The Group has not taken advantage of the transitional provisions of IFRS 2 'Share-based payment' in respect of equity-settled awards but instead applied IFRS 2 retrospectively to all awards granted, but not vested, as at 28 February 2004.

The total Group Income Statement charge for the year recognised in respect of share-based payments is £242m (2008 – £228m), which is made up of share option schemes and share bonus payments. Of this amount £204m (2008 – £199m) will be equity-settled and £38m (2008 – £29m) cash-settled.

a) Share option schemes

The Company had nine share option schemes in operation during the year, all of which are equity-settled schemes:

i) The Savings-related Share Option Scheme (1981) permits the grant to employees of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from employees of an amount between £5 and £250 per four-weekly period. Options are capable of being exercised at the end of the three or five-year period at a subscription price not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date.
ii) The Irish Savings-related Share Option Scheme (2000) permits the grant to Irish employees of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years with contributions from employees of an amount between €12 and €320 per four-weekly period. Options are capable of being exercised at the end of the three or five-year period at a subscription price not less than 80% of the average of the middle-market quotations of an ordinary share over the three dealing days immediately preceding the offer date.
iii) The Approved Executive Share Option Scheme (1994) was adopted on 17 October 1994. The exercise of options granted under this scheme will normally be conditional upon the achievement of a specified performance target related to the growth in earnings per share over a three-year period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme.
iv) The Unapproved Executive Share Option Scheme (1996) was adopted on 7 June 1996. The exercise of options granted under this scheme will normally be conditional upon the achievement of a specified performance target related to the growth in earnings per share over a three-year period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme.
v) The International Executive Share Option Scheme (1994) was adopted on 20 May 1994. This scheme permits the grant to selected non-UK executives of options to acquire ordinary shares on substantially the same basis as their UK counterparts. The exercise of options granted under this scheme will normally be conditional on the achievement of a specified performance target related to the growth in earnings per share over a three-year period. No further options will be granted under this scheme and it has been replaced by the Discretionary Share Option Plan (2004). There were no discounted options granted under this scheme.
vi) The Executive Incentive Plan (2004) was adopted on 5 July 2004. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options are normally exercisable between three and ten years from the date of grant for nil consideration.
vii) The Performance Share Plan (2004) was adopted on 5 July 2004 and amended on 29 June 2007. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options granted before 29 June 2007 are normally exercisable between four and ten years from the date of grant for nil consideration. Options granted after 29 June 2007 are normally exercisable between three and ten years from the date of grant for nil consideration. The exercise of options will normally be conditional on the achievement of specified performance targets related to the return on capital employed over a three-year period.
viii) The Discretionary Share Option Plan (2004) was adopted on 5 July 2004. This scheme permits the grant of approved, unapproved and international options in respect of ordinary shares to selected executives. Options are normally exercisable between three and ten years from the date of grant at a price not less than the middle-market quotation or average middle-market quotations of an ordinary share for the dealing day or three dealing days preceding the date of grant. The exercise of options will normally be conditional on the achievement of a specified performance target related to the annual percentage growth in earnings per share over a three-year period. There will be no discounted options granted under this scheme.
ix) The Group New Business Incentive Plan (2007) was adopted on 29 June 2007. This scheme permits the grant of options in respect of ordinary shares to selected executives. Options will normally vest in four tranches: four, five, six and seven years after the date of grant and will be exercisable for up to two years from the vesting dates for nil consideration. The exercise of options will normally be conditional on the achievement of specified performance targets related to the return on capital employed over the seven-year plan.

Notes to the Group financial statements continued

Note 27 Share-based payments continued

The following tables reconcile the number of share options outstanding and the weighted average exercise price (WAEP):

For the year ended 28 February 2009

		Savings-relatedshare option scheme		Irish savings-relatedshare option scheme		Approvedshare option scheme		Unapprovedshare option scheme	International executive	share option scheme		Nil costshare options
	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP
Outstanding at23 February
2008	153,361,820	281.40	5,083,009		300.71 16,229,846		324.45 77,043,605		307.00 36,970,259		333.22 10,838,238	0.00
Granted	38,531,375	311.00	1,642,089	311.00	3,308,213		426.79 18,297,370		426.82 13,664,591	422.88	3,591,855	0.00
Forfeited	(10,351,962) 299.64		(485,512) 293.84						(901,163) 384.34 (2,768,871) 388.51 (3,268,614) 327.65		–	–
Exercised	(38,731,136) 214.48		(820,683) 226.80						(2,767,976) 277.55 (11,272,220) 243.72 (3,468,031) 269.07		(106,385)	0.00
Outstanding at28 February2009	142,810,097	306.21	5,418,903		315.67 15,868,920		350.56 81,299,884		339.97 43,898,205		366.61 14,323,708	0.00
Exercisable as at28 February2009	6,553,484	220.72	398,093	233.61	5,574,827		259.54 36,205,357		260.09 12,340,929	268.72	2,048,225	–
Exercise pricerange (pence)		159.00 to248.00		159.00 to248.00		197.50 to313.50		164.00 to313.50		176.70 to312.75		–
Weighted averageremainingcontractuallife (years)		0.18		0.15		3.99		4.63		4.76		5.83
For the year ended 23 February 2008		Savings-relatedshare option scheme		Irish savings-relatedshare option scheme		Approvedshare option scheme		Unapprovedshare option scheme	International executive	share option scheme		Nil costshare options

	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP	Options	WAEP
Outstanding at24 February
2007	173,103,108	236.12	4,927,409		250.27 16,855,033		276.19 82,526,915		267.70 33,128,105	280.68	5,810,007	0.00
Granted	30,284,995	410.00	1,333,621	410.00	3,675,200		473.75 14,355,638		473.66 10,127,935	466.57	5,113,574	0.00
Forfeited	(9,470,529) 253.96		(401,169)	241.75			(926,135) 336.21 (3,399,364)	355.17	(1,999,671)	310.13	–	–
Exercised	(40,555,754) 190.56						(776,852) 198.83 (3,374,252) 242.77 (16,439,584)	245.18	(4,286,110) 252.90		(85,343)	0.00
Outstanding at23 February2008	153,361,820	281.40	5,083,009		300.71 16,229,846		324.45 77,043,605		307.00 36,970,259		333.22 10,838,238	0.00
Exercisable as at23 February2008	7,761,557	192.99	245,709	201.21	4,968,637		232.22 33,091,974	230.57	9,412,295	225.27	–	–
Exercise pricerange (pence)		159.00 to232.00		159.00 to232.00		197.50 to259.00		164.00 to259.00		176.70 to259.00		–
Weighted averageremainingcontractual
life (years)		0.20		0.20		3.94		4.59		4.06		–

Note 27 Share-based payments continued

Share options were exercised on a regular basis throughout the year. The average share price during the year to 28 February 2009 was 372.06p (2008 – 443.59p).

			2009			2008
	Savings-relatedshareoptionschemes	Executiveshareoptionschemes	Nil costoptionschemes	Savings-relatedshareoptionschemes	Executiveshareoptionschemes	Nil costoptionschemes
Expected dividend yield (%)	3.3%	3.3%	0.0%	2.4%	2.4%	0.0%
Expected volatility (%)	25-30%	25%	25%	20-21%	24%	24-27%
Risk-free interest rate (%)	3.2-3.8%		3.2-4.9% 4.6-4.9%	4.8%	5.0-5.3%	4.7-4.9%
Expected life of option (years)	3 or 5	6	6	3 or 5	6	6-9
Weighted average fair value of options granted (pence)	89.28	93.90	418.09	116.35	119.96	469.17
Probability of forfeiture (%)	20-25%	10%	0%	20-25%	10%	0%
Share price (pence)	361.00	425.20	418.09	470.00	471.12	469.17
Weighted average exercise price (pence)	311.00	425.20	0.00	410.00	471.12	0.00

Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in Tesco PLC option pricing models is the annualised standard deviation of the continuously compounded rates of return on the share over a period of time. In estimating the future volatility of the Company's share price, the Board consider the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the option, taking into account the remaining contractual life of the option.

b) Share bonus schemes

Eligible ROI employees are able to participate in a Share Bonus Scheme, an all-employee profit sharing scheme. Each year, employees receive a percentage of their earnings as either cash or shares.

The number and weighted average fair value (WAFV) of share bonuses awarded during the period were:

		2009		2008
	Sharesnumber	WAFVpence	Sharesnumber	WAFVpence
Shares in Success	21,295,232		431.05 18,019,768	470.45
Executive Incentive Scheme	10,996,677		415.68 10,012,950	456.11
Performance Share Plan	2,123,237	353.76	1,292,172	466.21
US Long-Term Incentive Plan	673,716	403.80	4,817,720	471.10

Notes to the Group financial statements continued

Note 28 Post-employment benefits

Pensions

Defined contribution plans

The contributions payable for defined contribution schemes of £11m (2008 – £8m) have been fully expensed against profits in the current year.

Defined benefit plans

United Kingdom

The principal plan within the Group is the Tesco PLC Pension Scheme, which is a funded defined benefit pension scheme in the UK, the assets of which are held as a segregated fund and administered by trustees. Watson Wyatt Limited, an independent actuary, carried out the latest triennial actuarial assessment of the scheme as at 31 March 2008, using the projected unit method.

The One Stop Senior Executives Pension Scheme is a funded defined benefit scheme open to senior executives and certain other employees at the invitation of the Company. An independent actuary, using the projected unit method, carried out the latest actuarial assessment of the scheme as at 5 April 2004.

Overseas

The valuations used for IAS 19 have been based on the most recent actuarial valuations and updated by Watson Wyatt Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes as at 28 February 2009. The schemes' assets are stated at their market values as at 28 February 2009. Watson Wyatt Limited have updated the most recent Republic of Ireland valuation. The liabilities relating to retirement healthcare benefits have also been determined in accordance with IAS 19, and are incorporated in the following tables.

Principal assumptions

The valuations used have been based on the most recent actuarial valuations and updated by Watson Wyatt Limited to take account of the requirements of IAS 19 in order to assess the liabilities of the schemes as at 28 February 2009. The major assumptions, on a weighted average basis, used by the actuaries were as follows:

	2009%	2008%	2007%
Rate of increase in salaries	3.7	5.0	4.5
Rate of increase in pensions in payment*	3.1	3.5	3.0
Rate of increase in deferred pensions*	3.2	3.5	3.0
Rate of increase in career average benefits	3.2	3.5	3.0
Discount rate	6.5	6.4	5.2
Price inflation	3.2	3.5	3.0

* In excess of any Guaranteed Minimum Pension (GMP) element.

The main financial assumption is the real discount rate i.e. the excess of the discount rate over the rate of price inflation. If this assumption increased/ decreased by 0.1%, the UK defined benefit obligation would decrease/increase by approximately £110m and the annual UK current service cost would decrease/increase by approximately £11m.

UK mortality assumptions

The Company conducts analysis of mortality trends under the Tesco PLC Pension Scheme in the UK as part of the triennial actuarial valuation of the Scheme. At the latest triennial actuarial valuation as at 31 March 2008, the following assumptions were adopted for funding purposes:

Base tables:

This assumption was used for the calculation of the pension liability as at 28 February 2009 for the main UK scheme.

As at 28 February 2009, the mortality assumptions have been strengthened. The base tables have been updated in line with medium cohort projections with a minimum improvement of 1% per annum from 31 March 2008 to 28 February 2009. In addition, the allowance for future mortality improvements has been changed to incorporate medium cohort projections with a minimum improvement of 1% per annum.

Note 28 Post-employment benefits continued

The mortality assumptions used for the calculation of the pension liabilities as at 24 February 2007 and 23 February 2008 were based on the previous triennial actuarial valuation as at 31 March 2005, which included the following assumptions for funding purposes:

Base tables:

PMA92C00 for male members with cohort improvements to 2000 and members taken to be two years older than actual age. PFA92C00 for female members with cohort improvements to 2000 and members taken to be half a year older than actual age.

Additionally, at the 31 March 2005 valuation an allowance was built in for future mortality improvements via a 0.2% reduction to the discount rate.

The following table illustrates the expectation of life of an average member retiring at age 65 at the Balance Sheet date and a member reaching age 65 at the same date +25 years:

		2009in years	2008in years	2007in years
Retiring at Reporting date at age 65:	Male	21.5	19.0	17.5
	Female	23.3	23.3	21.9
Retiring at Reporting date +25 years at age 65:	Male	23.9	20.6	18.4
	Female	25.8	24.7	23.0

Rates of return on scheme assets

The assets in the defined benefit pension schemes and the expected nominal rates of return were:

		2009		2008		2007
	Long-termrate of return%	Marketvalue£m	Long-termrate of return%	Marketvalue£m	Long-termrate of return%	Marketvalue£m
Equities	8.9	1,482	8.9	2,205	8.1	2,420
Bonds	5.5	1,080	5.7	901	5.2	812
Property	7.3	342	7.3	351	6.7	343
Other (alternative assets)	8.9	383	8.9	512	8.1	384
Cash	3.7	133	4.5	120	4.0	48
Total market value of assets		3,420		4,089		4,007

Movement in pension deficit during the year

Changes in the fair value of defined benefit pension plan assets are as follows:

	2009£m	2008£m	2007£m
Opening fair value of plan assets	4,089	4,007	3,448
Expected return	338	301	255
Actuarial (losses)/gains	(1,270)	(465)	82
Contributions by employer	376	340	321
Actual member contributions	8	7	7
Foreign currency translation	11	9	(2)
Benefits paid	(132)	(112)	(104)
Acquisitions through business combinations	–	2	–
Closing fair value of plan assets	3,420	4,089	4,007

Notes to the Group financial statements continued

Note 28 Post-employment benefits continued

Changes in the present value of defined benefit obligations are as follows:

	2009£m	2008£m	2007£m
Opening defined benefit obligation	(4,927)	(4,957)	(4,659)
Current service cost	(428)	(461)	(466)
Interest cost	(313)	(254)	(221)
Gain on change of assumptions	760	672	71
Experience losses	(117)	(21)	(41)
Foreign currency translation	(13)	(8)	4
Benefits paid	132	112	104
Actual member contributions	(8)	(7)	(7)
Past service gains	–	–	258
Acquisitions through business combinations	–	(3)	–
Closing defined benefit obligation	(4,914)	(4,927)	(4,957)

The amounts that have been charged to the Group Income Statement and Group Statement of Recognised Income and Expense for the year ended 28 February 2009 are set out below:

	2009£m	2008£m	2007£m
Analysis of the amount (charged)/credited to operating profit:
Current service cost	(428)	(461)	(466)
Past service gains	–	–	258
Total charge to operating profit	(428)	(461)	(208)
Analysis of the amount credited/(charged) to finance income:
Expected return on pension schemes' assets	338	301	255
Interest on pension schemes' liabilities	(313)	(254)	(221)
Net pension finance income (note 5)	25	47	34
Total charge to the Group Income Statement	(403)	(414)	(174)

In 2007, in line with changes to the Finance Act 2006, the scheme rules were amended from 6 April 2006 to allow employees to commute (convert) a larger proportion of their pension for a cash lump sum at retirement. Accordingly, the assumptions made in calculating the Group's defined benefit pension liability have been revised, resulting in a gain of £250m being recognised in Group operating profit in 2006/7. Revisions to this assumption will be reflected in the Group Statement of Recognised Income and Expense. Changes to scheme rules in the Republic of Ireland affecting early retirement have reduced pension liabilities by a further £8m, which was also shown as a past service gain in the Group Income Statement in 2006/7.

	2009£m	2008£m	2007£m
Analysis of the amount recognised in the Group Statement of Recognised Income and Expense:
Actual return less expected return on pension schemes' assets	(1,270)	(465)	82
Experience losses arising on the schemes' liabilities	(117)	(21)	(41)
Foreign currency translation	(2)	1	2
Changes in assumptions underlying the present value of the schemes' liabilities	760	672	71
Total (loss)/gain recognised in the Group Statement of Recognised Income and Expense	(629)	187	114

The cumulative losses recognised through the Group Statement of Recognised Income and Expense since the date of transition to IFRS are £1,001m (2008 – £372m).

Note 28 Post-employment benefits continued

Summary of movements in deficit during the year

	2009£m	2008£m	2007£m
Deficit in schemes at beginning of the year	(838)	(950)	(1,211)
Current service cost	(428)	(461)	(466)
Past service gains	–	–	258
Other finance income	25	47	34
Contributions by employer	376	340	321
Foreign currency translation	(2)	1	2
Actuarial (loss)/gain	(627)	186	112
Acquisitions through business combinations	–	(1)	–
Deficit in schemes at end of the year	(1,494)	(838)	(950)

History of movements

The historical movement in defined benefit pension schemes assets and liabilities and history of experience gains and losses are as follows:

	2009£m	2008£m	2007£m	2006£m
Total market value of assets	3,420	4,089	4,007	3,448
Present value of liabilities relating to unfunded schemes	(39)	(34)	(27)	(17)
Present value of liabilities relating to partially funded schemes	(4,875)	(4,893)	(4,930)	(4,642)
Pension deficit	(1,494)	(838)	(950)	(1,211)
Experience (losses)/gains on scheme assets	(1,270)	(465)	82	309
Experience losses on plan liabilities	(117)	(20)	(41)	(24)

Post-employment benefits other than pensions

The Company operates a scheme offering retirement healthcare benefits. The cost of providing these benefits has been accounted for on a similar basis to that used for defined benefit pension schemes.

The liability as at 28 February 2009 of £10m (2008 – £11m) was determined in accordance with the advice of independent actuaries. In 2008/9, £0.7m (2007/8 – £0.6m) has been charged to the Group Income Statement and £0.5m (2007/8 – £0.7m) of benefits were paid.

A change of 1.0% in assumed healthcare cost trend rates would have the following effect:

	2009£m	2008£m	2007£m
Effect of a 1% increase in assumed healthcare cost trend rate on:
Service and interest cost	0.1	0.1	0.1
Defined benefit obligation	1.6	1.6	1.3
Effect of a 1% decrease in assumed healthcare cost trend rate on:
Service and interest cost	(0.1)	(0.1)	(0.1)
Defined benefit obligation	(1.3)	(1.3)	(1.3)

Expected contributions

A formal actuarial valuation is carried out triennially for the scheme trustees by a professionally qualified independent actuary. The purpose of the valuation is to agree a funding plan to ensure that present and future contributions should be sufficient to meet future liabilities. The actuarial valuation of approved schemes as at 31 March 2008 has been concluded and company contributions are increasing to 11.1% from 10.9%. On this basis the Group expects to make contributions of approximately £410m to defined benefit pension schemes in the year ending 27 February 2010.

Notes to the Group financial statements continued

Note 29 Called up share capital

		2009		2008
	Ordinary shares of 5p each		Ordinary shares of 5p each
	Number	£m	Number	£m
Authorised:
At beginning of year	10,858,000,000	543	10,858,000,000	543
Authorised during the year	–	–	–	–
At end of year	10,858,000,000	543	10,858,000,000	543
Allotted, called up and fully paid:
At beginning of year	7,863,498,783	393	7,947,349,558	397
Share options	57,060,046	3	65,432,552	3
Share buy-back	(25,214,811)	(1)	(149,283,327)	(7)
At end of year	7,895,344,018	395	7,863,498,783	393

During the financial year, 57 million (2008 – 65 million) shares of 5p each were issued in relation to share options for aggregate consideration of £130m (2008 – £138m).

During the year, the Company purchased and subsequently cancelled 25,214,811 (2008 – 149,283,327) shares of 5p each, representing 0% (2008 – 2%) of the called up share capital, at an average price of £3.98 (2008 – £4.38) per share. The total consideration, including expenses, was £100m (2008 – £657m). The excess of the consideration over the nominal value has been charged to retained earnings.

Between 1 March 2009 and 17 April 2009, options over 3,120,922 ordinary shares have been exercised under the terms of the Savings-related Share Option Scheme (1981) and the Irish Savings-related Share Option Scheme (2000). Between 1 March 2009 and 17 April 2009, options over 324,991 ordinary shares have been exercised under the terms of the Executive Share Option Schemes (1994 and 1996) and the Discretionary Share Option Plan (2004).

As at 28 February 2009, the Directors were authorised to purchase up to a maximum in aggregate of 784.8 million (2008 – 793.4 million) ordinary shares.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the meetings of the Company.

Note 30 Statement of changes in equity

								Retained	Totalequityearnings attributable
	Issuedsharecapital£m	Sharepremium£m	reserves£m	CapitalOther redemptionreserve£m	Hedgingreserve£m	Translationreserve£m	Treasuryshares£m	Retainedearnings£m	to equityholders ofthe parent£m	Minorityinterests£m	Total£m
At 23 February 2008	393	4,511	40	12	4	245	(204)	6,814	11,815	87	11,902
Foreign currency translationdifferences	–	–	–	–	–	(269)	–	–	(269)	(6)	(275)
Actuarial loss on definedbenefit schemes	–	–	–	–	–	(2)	–	(627)	(629)	–	(629)
Tax on items taken directly toor transferred from equity	–	–	–	–	–	199	–	236	435	–	435
Change in fair value ofavailable-for-sale financial assets –		–	–	–	–	–	–	3	3	–	3
Gains on cash flow hedges	–	–	–	–	171	–	–	–	171	–	171
Purchase of treasury shares	–	–	–	–	–	–	(165)	–	(165)	–	(165)
Share-based payments	–	–	–	–	–	–	137	67	204	–	204
Issue of shares	3	127	–	–	–	–	–	–	130	–	130
Share buy-backs	(1)	–	–	1	–	–	–	–	–	–	–
Purchase of minority interest	–	–	–	–	–	–	–	–	–	(26)	(26)
Dividends paid to minority interests –		–	–	–	–	–	–	–	–	(3)	(3)
Fair value reserve arising onacquisition of TPF	–	–	–	–	–	–	–	(35)	(35)	–	(35)
Profit for the year	–	–	–	–	–	–	–	2,161	2,161	5	2,166
Equity dividends authorisedin the year	–	–	–	–	–	–	–	(883)	(883)	–	(883)
At 28 February 2009	395	4,638	40	13	175	173	(232)	7,736	12,938	57	12,995

								Retained	Totalequityearnings attributable
	Issuedsharecapital£m	Sharepremium£m	reserves£m	CapitalOther redemptionreserve£m	Hedgingreserve£m	Translationreserve£m	Treasuryshares£m	Retainedearnings£m	to equityholders ofthe parent£m	Minorityinterests£m	Total£m
At 24 February 2007	397	4,376	40	5	(33)	(39)	(154)	5,914	10,506	65	10,571
Foreign currency translationdifferences	–	–	–	–	–	33	–	–	33	5	38
Actuarial gain on definedbenefit schemes	–	–	–	–	–	1	–	186	187	–	187
Tax on items taken directly toor transferred from equity	–	–	–	–	–	250	–	(127)	123	–	123
Decrease in fair value ofavailable-for-sale financial assets –		–	–	–	–	–	–	(4)	(4)	–	(4)
Gains on cash flow hedges	–	–	–	–	37	–	–	–	37	–	37
Purchase of treasury shares	–	–	–	–	–	–	(118)	–	(118)	–	(118)
Share-based payments	–	–	–	–	–	–	68	131	199	–	199
Issue of shares	3	135	–	–	–	–	–	–	138	–	138
Share buy-backs	(7)	–	–	7	–	–	–	(665)	(665)	–	(665)
Purchase of minority interest	–	–	–	–	–	–	–	47	47	(27)	20
Minority interest on acquisitionsof subsidiaries	–	–	–	–	–	–	–	–	–	38	38
Profit for the year	–	–	–	–	–	–	–	2,124	2,124	6	2,130
Equity dividends authorisedin the year	–	–	–	–	–	–	–	(792)	(792)	–	(792)
At 23 February 2008	393	4,511	40	12	4	245	(204)	6,814	11,815	87	11,902

Notes to the Group financial statements continued

Note 30 Statement of changes in equity continued

Share premium account

The share premium account is used to record amounts received in excess of the nominal value of shares on issue of new shares.

Translation reserve

The translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. It is also used to record the movements in net investment hedges.

Treasury shares

The employee benefit trusts hold shares in Tesco PLC for the purpose of the various executive share incentive and profit share schemes. At 28 February 2009, the trusts held 51.1 million shares (2008 – 47.4 million), which cost £203m (2008 – £184m) and had a market value of £170m (2008 – £190m).

The voting rights in relation to the shares are exercisable by the Trustee, however, in accordance with investor guidelines the Trustee abstains from voting.

At 28 February 2009, the Group's Trustees also held 8.7 million (2008 – 7.8 million) unallocated shares in Tesco PLC which cost £29m (2008 – £20m).

Other reserves

The merger reserve arose on the acquisition of Hillards PLC in 1987.

Share buy-back liability

Insider trading rules prevent the Group from buying back Tesco PLC shares in the market during specified close periods (including the period between the year end and the annual results announcement). However, if an irrevocable agreement is signed between the Company and a third party, they can continue to buy back shares on behalf of the Company. In 2008, three such arrangements were in place at the year end and in accordance with IAS 32, the Company recognised a financial liability equal to the estimated value of the shares purchasable under these agreements. A liability of £100m was recognised within other payables for this amount. There were no such agreements in place in 2009.

Capital redemption reserve

Other

The cumulative goodwill written off against the reserves of the Group as at 28 February 2009 amounted to £718m (2008 – £718m).

Fair value reserve arising on acquisition of TPF

The share of fair value reserve has arisen on the acquisition of TPF and is made up of the reversal of previous profits recognised due to equity accounting of the joint venture and increase in fair value of the underlying identifiable assets since initial acquisition.

Note 31 Business combinations

The Group has made a number of acquisitions in the year, of which the most significant acquisitions have been disclosed separately and the remainder shown in aggregate.

The net assets and results of the acquired businesses are included in the consolidated accounts of the Group from the date of acquisition. Acquisition accounting has been applied and the goodwill arising has been capitalised and is subject to annual impairment testing.

The goodwill acquired in the business combinations listed below has been allocated to the single group of cash-generating units represented by the acquired businesses, as this is the lowest level within the Group at which the goodwill is monitored internally. Goodwill arising on acquisitions in the year is attributable mainly to location, the assembled workforce and the synergies expected to be achieved.

The fair values currently established for acquisitions made in the year to 28 February 2009 are provisional. Fair values will be reviewed based on additional information up to one year from the date of acquisition. The Directors do not believe that any net adjustments resulting from such a review would have a material effect on the Group.

Had all the combinations listed below taken place at the beginning of the financial year, with the exception of Dobbies Garden Centre PLC which became a subsidiary in 2007/8, the operating profit of the Group would have been £3,391m and revenue would have been £55,750m. The pro-forma information is provided for comparative purposes only and does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations of the combined companies.

Tesco Personal Finance Group Limited (TPF)

On 19 December 2008, the Group acquired the remaining 50% of the share capital of its joint venture TPF, a provider of banking and other financial services in the United Kingdom, making it a wholly-owned subsidiary undertaking.

The fair value of the identifiable assets and liabilities of TPF as at the date of acquisition were:

	Pre-acquisitioncarrying	Fair value	Recognisedvalues on
	amounts£m	adjustments£m	acquisition£m
Property, plant and equipment	24	(3)	21
Intangible assets	–	259	259
Loans and advances to banks and other financial assets	3	–	3
Loans and advances to customers	3,715	(347)	3,368
Other investments	259	–	259
Trade and other receivables	158	–	158
Deferred tax asset	12	40	52
Customer deposits	(3,175)	–	(3,175)
Bank overdraft	(92)	–	(92)
Borrowings	(226)	–	(226)
Trade and other payables	(177)	(18)	(195)
Net assets/(liabilities)	501	(69)	432
Fair value of acquired net assets of existing interest			(216)
Net assets acquired			216
Goodwill arising on acquisition			767
			983
Consideration:
Cash consideration			955
Costs associated with the acquisition			28
Total consideration			983

From the date of acquisition, the acquired business has contributed £163m to revenue and £34m of operating profit to the Group.

Notes to the Group financial statements continued

Note 31 Business combinations continued

Homever

On 30 September 2008, the Group acquired 100% of the share capital of Homever, a retailer in South Korea.

The fair value of the identifiable assets and liabilities of Homever as at the date of acquisition were:

	Pre-acquisitioncarryingamounts£m	Adjustmentsto alignaccountingpolicies£m	Fair valueadjustments£m	Recognisedvalues onacquisition£m
Property, plant and equipment	643	2	37	682
Intangible assets	96	(2)	(83)	11
Other non-current assets	63	–	(3)	60
Deferred tax asset	1	–	(1)	–
Inventories	45	–	(8)	37
Trade and other receivables	32	–	(5)	27
Cash and cash equivalents	16	–	–	16
Trade and other payables	(204)	–	(16)	(220)
Provision for liabilities and charges	(5)	(2)	(52)	(59)
Bank and other borrowings	(611)	–	–	(611)
Deferred tax liability	(5)	(35)	–	(40)
Net assets/(liabilities) acquired	71	(37)	(131)	(97)
Goodwill arising on acquisition				362
				265
Consideration:
Cash consideration				259
Costs associated with the acquisition				6
Total consideration				265

From the date of acquisition, the acquired business has contributed £326m to revenue and £18m of operating loss to the Group.

Dobbies Garden Centres PLC

On 31 July 2008, the Group completed the acquisition of the remaining 34.5% (2007/8 – 65.5%) of the share capital of Dobbies Garden Centres PLC (Dobbies), a retailer in the United Kingdom, for total consideration of £43m.

This resulted in additional goodwill of £18m, arising on acquisition during the year, based on Dobbies net assets of £77m.

Other acquisitions

The other acquisitions in the year include the trade and assets of Sandyholm Garden Centre and some smaller businesses. The companies acquired undertake retail activities.

Fair value adjustments of £2m were identified in addition to the £3m pre-acquisition carrying amounts of net assets, resulting in the recognition of £5m as the fair value of net assets acquired. With cash consideration of £10m, this has resulted in the recognition of £5m of goodwill arising on acquisition.

The post-acquisition contribution of the other acquisitions to the Group was £5m to revenue and £1m to operating profit.

Note 32 Related party transactions

i) Trading transactions

		Sales torelated parties		Purchases fromrelated parties		Amounts owedby related parties		Amounts owedto related parties
	2009£m	2008£m	2009£m	2008£m	2009£m	2008£m	2009£m	2008£m
Joint ventures	183	164	290	238	14	39	6	34
Associates	–	–	1,175	771	–	–	156	82

Sales to related parties consists of services/management fees and loan interest.

Purchases from related parties include £174m (2008 – £157m) of rentals payable to the Group's joint ventures, including those joint ventures formed as part of the sale and leaseback programme.

Note 32 Related party transactions continued

Purchases from associates include £1,171m (2008 – £766m) of fuel purchased from Greenergy International Limited.

ii) Non-trading transactions

		Sales torelated parties		Loans torelated parties		Loans fromrelated parties		Injection ofequity funding
	2009£m	2008£m	2009£m	2008£m	2009£m	2008£m	2009£m	2008£m
Joint ventures	465	652	262	173	20	10	–	8

Transactions between the Group and the Group's pension plans are disclosed in note 28.

A number of the Group's subsidiaries are members of one or more partnerships to whom the provisions of the Partnerships and Unlimited Companies (Accounts) Regulations 1993 ('Regulations') apply. The accounts for those partnerships have been consolidated into these accounts pursuant to Regulation 7 of the Regulations.

On 19 December 2008, the Group formed a property joint venture with Tesco Pension Trustees. The limited partnership contains three superstores which have been sold from and leased back to Tesco. The Group sold assets for net proceeds of £199m to the joint venture which had a net book value of approximately £107m. The Group's share of the profit realised from this transaction is included within profit arising on property-related items in 2008/9.

On 15 August 2008, the Group formed a property joint venture with the Universities Superannuation Scheme. The limited partnership contains four superstores which have been sold from and leased back to Tesco. The Group sold assets for net proceeds of £222m to the joint venture which had a net book value of £136m. The Group's share of the profit realised from this transaction is included within profit arising on property-related items in 2008/9. Another smaller transaction with BP Pension Trustees was completed in June 2008 where £44m of assets were transferred.

On 20 March 2007, the Group formed a property joint venture with The British Land Company PLC. The limited partnership contains 21 superstores which have been sold from and leased back to Tesco. The Group sold assets for net proceeds of £652m to the joint venture which had a net book value of approximately £350m. The Group's share of the profit realised from this transaction is included within profit arising on property-related items in 2007/8.

iii) Transactions with key management personnel

Transactions on an arm's length basis with Tesco Personal Finance Group Limited which became a wholly-owned subsidiary on 19 December 2008 were as follows:

		Credit cards andpersonal loan balances		Saving deposit accounts
	Numberof keymanagementpersonnel	£k	Numberof keymanagementpersonnel	£k
At 23 February 2008	2	39	2	19
At 19 December 2008	2	30	2	44
At 28 February 2009	2	30	2	77

During the year, there were no other material transactions or balances between the Group and its key management personnel or members of their close family.

Notes to the Group financial statements continued

Note 33 Reconciliation of profit before tax to net cash generated from operations

	2009£m	2008£m
Profit before tax	2,954	2,803
Net finance costs	362	63
Share of post-tax profits of joint ventures and associates	(110)	(75)
Operating profit	3,206	2,791
Depreciation and amortisation	1,189	992
Profit arising on property-related items	(236)	(188)
Profit arising on sale of non property-related items	3	–
Net reversal of impairment of property, plant and equipment	(22)	(10)
Adjustment for non-cash element of pensions charge	52	121
Share-based payments	204	199
Increase in inventories	(95)	(376)
Decrease/(increase) in trade and other receivables	79	(71)
Increase in trade and other payables	691	641
Increase in TPF loans and advances to customers	(20)	–
Increase in TPF loans and advances to banks and other financial assets	(2,126)	–
Increase in TPF customer deposits and other financial liabilities	2,053	–
Increase in working capital	582	194
Cash generated from operations	4,978	4,099

The increase in working capital includes the impact of translating foreign currency working capital movements at average exchange rates rather than period end exchange rates.

Note 34 Analysis of changes in net debt

	At23 February2008£m	Cash flow£m	Acquisitions£m	Othernon-cashmovements£m	Eliminationof TPF£m	At28 February2009£m
Cash and cash equivalents	1,788	1,601	–	120	(37)	3,472
Short-term investments	360	873	–	–	–	1,233
Finance lease receivables	5	(5)	–	–	–	–
Joint venture loan receivables	173	242	(91)	(62)	–	262
Derivative financial instruments	313	(183)	–	1,730	(2)	1,858
Cash and receivables	2,639	2,528	(91)	1,788	(39)	6,825
Bank and other borrowings	(2,033)	(1,025)	(611)	(343)	588	(3,424)
Finance lease payables	(51)	23	–	(19)	–	(47)
Derivative financial instruments and other liabilities	(443)	941	–	(1,023)	42	(483)
Debt due within one year	(2,527)	(61)	(611)	(1,385)	630	(3,954)
Bank and other borrowings	(5,757)	(5,290)	–	(1,148)	222	(11,973)
Finance lease payables	(215)	–	–	19	–	(196)
Derivative financial instruments and other liabilities	(322)	53	–	(33)	–	(302)
Debt due after one year	(6,294)	(5,237)	–	(1,162)	222	(12,471)
	(6,182)	(2,770)	(702)	(759)	813	(9,600)

Note 35 Commitments and contingencies

Capital commitments

At 28 February 2009 there were commitments for capital expenditure contracted for, but not provided, of £1,551m (2008 – £1,309m), principally relating to the store development programme.

Contingent liabilities

For details of assets held under finance leases, which are pledged as security for the finance lease liabilities, see note 11.

There are a number of contingent liabilities that arise in the normal course of business which if realised are not expected to result in a material liability to the Group. The Group recognises provisions for liabilities when it is more likely than not a settlement will be required and the value of such a payment can be reliably estimated.

Tesco Personal Finance Group Limited

At 28 February 2009, Tesco Personal Finance Group Limited (TPF) has commitments of formal standby facilities, credit lines and other commitments to lend, totalling £5.7bn. The amount is intended to provide an indication of the volume of business transacted and not of the underlying credit or other risks.

The Financial Services Compensation Scheme ('FSCS') compensates customers of UK financial institutions when those institutions are unable to pay out. Firms are being levied only for interest costs and management expenses of the scheme (and not for the capital repayments which will ultimately need to be made), but the amounts have increased significantly compared to prior years. The levy is calculated based on deposit balances held as at 31 December in each year and as such, this is seen as the 'trigger event' under accounting rules. TPF was a market participant at 31 December 2007 and 31 December 2008 and has accrued for its share of the 2008/9 and 2009/10 levy which was not material to the Group. Going forward further provisions in respect of these costs are likely, the ultimate cost of which remains uncertain.

Note 36 Capital resources

The following table shows the composition of regulatory capital resources of Tesco Personal Finance Group Limited at the Balance Sheet date:

	2009£m	2008£m
Tier 1 capital:
Shareholders funds and minority interests	566	–
Tier 2 capital:
Qualifying subordinated debt	205	–
Other interests in tier 2 capital	19	–
Supervisory deductions	(259)	–
Total regulatory capital	531	–

The movement of tier 1 capital from the date of acquisition to the Balance Sheet date is analysed as follows:

	2009£m	2008£m
At 19 December 2008*	559	–
Profit attributable to shareholders	7	–
At 28 February 2009	566	–

* Tesco Personal Finance Group Limited was acquired on 19 December 2008.

It is Tesco Personal Finance Group Limited's (TPF) policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, TPF has regard to the supervisory requirements of the Financial Services Authority ('FSA'). The FSA uses Individual Capital Guidance ('ICG') as a measure of capital adequacy in the UK banking sector, comparing a bank's capital resources with its riskweighted assets (the assets and off-balance sheet exposures are 'weighted' to reflect the inherent credit and other risks). TPF has complied with the FSA's capital requirements throughout the period between the date of acquisition and the Balance Sheet date.

Notes to the Group financial statements continued

Note 37 Leasing commitments

Finance lease commitments – Group as lessee

Future minimum lease payments under finance leases and hire purchase contracts, together with the present value of the net minimum lease payments are as follows:

		Minimum lease payments		Present value ofminimum lease payments
	2009£m	2008£m	2009£m	2008£m
Within one year	55	62	47	51
Greater than one year but less than five years	140	181	114	156
After five years	172	130	82	59
Total minimum lease payments	367	373	243	266
Less future finance charges	(124)	(107)
Present value of minimum lease payments	243	266
Analysed as:
Current finance lease payables	47	51
Non-current finance lease payables	196	215
	243	266

Finance lease receivables – Group as lessor

In 2006, the Group entered into finance leasing arrangements with UK staff for certain of its electronic equipment as part of the Computers for Staff scheme. The average term of finance leases entered into was three years and these all expired in 2008. The interest rate inherent in the leases was fixed at the contract date for all of the lease term. The average effective interest rate contracted approximated to 2.6% per annum. The fair value of the Group's finance lease receivables at 23 February 2008 was £5m.

Future minimum lease receivables under finance leases together with the present value of the net minimum lease receivables are as follows:

		Minimum lease payments	Present value ofminimum lease payments
	2009£m	2008£m	2009£m	2008£m
Within one year		–5	–	5
Net finance lease receivables		–5	–	5

Operating lease commitments – Group as lessee

Future minimum rentals payable under non-cancellable operating leases are as follows:

	2009£m	2008£m
Within one year	754	551
Greater than one year but less than five years	3,069	2,190
After five years	9,170	7,127
Total minimum lease payments	12,993	9,868

Operating lease commitments with joint ventures

Since 1988, the Group has entered into several joint ventures and sold and leased back properties to and from these joint ventures. The terms of these sale and leasebacks vary, however, common factors include: the sale of the properties to the joint venture at market value, options at the end of the lease for the Group to repurchase the properties at market value, market rent reviews and 20-25 year lease terms. The Group reviews the substance as well as the form of the arrangements when making the judgement as to whether these leases are operating or finance leases; all of the leases under these arrangements are operating leases.

Operating lease receivables – Group as lessor

The Group both rents out its investment properties and also sublets various leased buildings under operating leases. At the Balance Sheet date, the following future minimum lease payments are contractually receivable from tenants:

	2009£m	2008£m
Within one year	201	141
Greater than one year but less than five years	445	341
After five years	335	313
Total minimum lease payments	981	795

REGISTERED OFFICE OF THE ISSUER

Tesco plc Tesco House Delamare Road Cheshunt, Hertfordshire EN8 9SL United Kingdom

JOINT BOOK-RUNNING MANAGERS

Barclays Capital Inc. Citigroup Global Markets Inc. 745 Seventh Avenue 388 Greenwich Street New York, NY 10019 New York, NY 10013 United States of America United States of America

60 Wall Street One Bryant Park United States of America United States of America

Deutsche Bank Securities Inc. Merrill Lynch, Pierce, Fenner & Smith Incorporated

New York, NY 10005 New York, NY 10036

LEGAL ADVISERS TO THE ISSUER

As to U.S. and English law:

Freshfields Bruckhaus Deringer LLP

65 Fleet Street London EC4Y 1HS United Kingdom

LEGAL ADVISERS TO THE INITIAL PURCHASERS

As to U.S. law:

Davis Polk & Wardwell LLP 99 Gresham Street London EC2V 7NG United Kingdom

INDEPENDENT AUDITORS

PricewaterhouseCoopers LLP

One Embankment Place London WC2N 6RH United Kingdom

FISCAL AGENT, PAYING AGENT, TRANSFER AGENT AND REGISTRAR

Citibank, N.A., London Branch

Agency and Trust Citigroup Centre 2 Canada Square Canary Wharf London E14 5LB United Kingdom

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Tesco PLC — Capital/Financing Update 2011

4605_prs_2011-11-30_80ca7445-4b2e-4074-8dc8-63cb71409df5.pdf

IMPORTANT NOTICE

$1,000,000,000

Tesco PLC

$500,000,000 2.000% Senior Notes due 2014 $500,000,000 2.700% Senior Notes due 2017 ________________

Investing in the notes involves risks. See "Risk Factors" beginning on page 16.

Price of the 2.000% Senior Notes due 2014: 99.896% plus accrued interest, if any, from December 5, 2011 Price of the 2.700% Senior Notes due 2017: 99.890% plus accrued interest, if any, from December 5, 2011

NOTICE TO NEW HAMPSHIRE RESIDENTS

NOTICE TO UK INVESTORS

WEBSITE INFORMATION

PRESENTATION OF FINANCIAL AND OTHER DATA

Financial Data

Auditors' Reports

Reclassification of Certain Financial Information

Rounding

Non-IFRS Measures

Industry Data

Trademark

Third-Party Data

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

CURRENCY PRESENTATION

EXCHANGE RATE VARIATION

OVERVIEW OF THE GROUP

Overview

Our Strategy

Our Key Strengths

Recent Developments

OVERVIEW OF THE OFFERING

Risk Factors

The Issuer

RISK FACTORS

Risks Related to Our Business

Business strategy

Financial strategy and group treasury risk (excluding Tesco Bank)

Pension risks

Competition and consolidation

Reputational risk

Operational threats and performance risk in the business

Property

Information Technology ("IT") systems and infrastructure

People

Product safety

Health and safety

Fraud, compliance and internal controls

Regulatory, economic and political risks

Activism and terrorism

Climate change

Risks Related to Tesco Bank

Funding and liquidity

External environment

Insurance risk

Regulatory environment

Operational risk

Transformation program

Risks Related to the Notes

We may be able to incur substantially more debt in the future.

An active liquid trading market for the notes may not develop, and the transfer of the notes will be subject to restrictions.

Investors in the notes may have limited recourse against the independent auditors.

USE OF PROCEEDS

CAPITALIZATION

SELECTED FINANCIAL INFORMATION

Selected Group Income Statement Data

Reconciliation of Underlying Profit Before Tax from Continuing Operations to Profit Before Tax

Reconciliation of Operating Profit to Trading Profit

Selected Group Balance Sheet Data

Selected Group Cash Flow Data

Selected Reconciliation of Group Net Cash Flow to Movement in Net Debt

OPERATING AND FINANCIAL REVIEW

Overview

Business Segments

Fiscal Year and Interim Period

Reclassification of Certain Financial Information

Factors Affecting Our Operating Results

Trading Profit and Underlying Profit Before Tax

Results of Operations

26 weeks ended August 27, 2011 compared to 26 weeks ended August 28, 2010

Revenues

Profitability

Tesco PLC Capital/Financing Update 2011