- + 1. Accounting policiesGeneral
These consolidated Annual Financial Statements comprise Massmart Holdings Limited (the “Company”) and its subsidiaries (collectively the “Group”).
The Group operates retail stores in nine formats in sub-Saharan Africa, aggregated into four reportable segments, focused on high-volume, low-margin, low-cost distribution of mainly branded consumer goods for cash.
The principal offering for each segment is as follows:
- Massdiscounters – general merchandise discounter and food retailer
- Masswarehouse – warehouse club
- Massbuild – home improvement retailer and building materials supplier
- Masscash – food wholesaler, retailer and buying association.
The Group’s four divisions operate in two principal geographical areas, South Africa and the rest of Africa, and the Group’s geographic segments are reported on this basis.
Basis of accounting
The Group Annual Financial Statements have been prepared on the historical cost basis, except for certain financial instruments and non-current assets held for sale.
These Group Annual Financial Statements have been prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (IFRS), Interpretations issued by the International Accounting Standards Board, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, the Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, the JSE Listing Requirements and the requirements of the Companies Act, 71 of 2008 of South Africa. The accounting policies are consistent with that of the previous financial year as none of the amendments coming into effect in the current financial year have had a material impact on the financial reporting of the Group. During the current period the Group reassessed the designation of a number of its intercompany loans to its foreign operations in Africa, as per IAS 21 The Effects of Changes in Foreign Currencies. As a result, certain loans were designated as part of the Group’s net investment in these foreign operations and the associated foreign exchange gains and losses have been recognised in the foreign currency translation reserve.
The principal accounting policies adopted are set out below.
Basis of consolidation
The Group Annual Financial Statements incorporate the Annual Financial Statements of the Company and the entities it controls as at 27 December 2015. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Group considers all relevant facts and circumstances in assessing whether it has power over an investee and re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. A change in the ownership interest of a subsidiary, without a loss of, is accounted for as an equity transaction. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year, are included in the Statement of Comprehensive Income, Statement of Financial Position and the Statement of Cash Flows, from the date the Group gains control until the date the Group ceases to control the subsidiary.
All inter-company transactions and balances, income and expenses are eliminated in full on consolidation. The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in line with those used by the Group.
Separate disclosure is made of non-controlling interests where the Group’s investment is less than 100%. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the allocated share of changes in equity since the date of the combination. Total comprehensive income within a subsidiary is attributed to the non-controlling interest even if it results in a deficit balance. The Group applies a policy of treating transactions with non-controlling interest holders as transactions with equity holders of the Group. Disposals to non-controlling interest holders that do not result in the loss of control, result in gains and losses for the Group that are recorded directly in the Statement of Changes in Equity. The difference between any consideration paid and the relevant share of the net asset value acquired from non-controlling interests is recorded directly in the Statement of Changes in Equity.
Fair value measurement
The Group measures financial instruments such as derivatives and certain investments at fair value at each reporting date. The fair values of financial instruments measured at amortised cost are disclosed should it be determined that the carrying value of these instruments does not reasonably approximate their fair value at each reporting date.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
- In the principal market for the asset or liability, or
- In the absence of a principal market, in the most advantageous market for the asset or liability
The principal or the most advantageous market must be accessible by the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
- Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities
- Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable
- Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable
For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between the Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.
Fair value of financial instruments
The fair values of listed investments are calculated by reference to stock exchange quoted selling prices at the close of business on the reporting date, without any deduction for transaction costs. For financial instruments not traded in an active market, the fair value is determined using the appropriate valuation techniques which include:
- Using recent arm’s length market transactions
- Reference to the current fair value of another instrument that is substantially the same
- A discounted cash flow analysis or other valuation models
The acquisition of subsidiaries is accounted for using the acquisition method. The cost of an acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition related costs are expensed as incurred and included in other operating costs in the Income Statement. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s net fair value of the identifiable net assets.
Any contingent consideration forming part of the purchase price is recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 Financial Instruments: Recognition and Measurement, is measured at fair value with changes in fair value recognised in the Income Statement. If the contingent consideration is not within this scope, it is measured in accordance with the appropriate IFRS. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity.
Goodwill arising on consolidation of a subsidiary represents the excess of the fair value of the consideration transferred, the recognised amount of the non-controlling interests in the acquiree, and if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree, over the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the Income Statement as a gain on bargain purchase in the year of acquisition.
Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (CGUs) (or group of CGUs) expected to benefit from the synergies of the combination, and represent the lowest level within the Group at which management monitors goodwill. CGUs to which goodwill have been allocated are tested for impairment annually, or more frequently when there is an indication that the units may be impaired. If the recoverable amount of the CGU is less than the carrying amount of the units, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the units and then to the other assets of the units pro-rata on the basis of the carrying amount of each asset in the units. An impairment loss recognised for goodwill is not reversed in a subsequent year.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
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 principally through a sale transaction rather than through 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 which should be expected to qualify for recognition as a completed sale 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 the assets’ previous carrying amount and fair value less costs to sell, other than financial assets and deferred tax assets which continue to be measured in accordance with their relevant accounting standards.
Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale.
Property, plant and equipment
Property, plant and equipment are initially recognised at acquisition cost, including any costs directly attributable to bringing the assets to the location and condition necessary for it to be capable of operating in the manner intended by the Group’s management.
Other than freehold land, which is subsequently carried at cost less accumulated impairment losses, property, plant and equipment are subsequently carried at cost less accumulated depreciation, reduced by any accumulated impairment losses.
The cost of property meeting the definition of a qualifying asset in terms of IAS 23 Borrowing Costs includes borrowing costs capitalised in terms of the Group’s borrowing cost policy.
Where expenditure incurred on property, plant and equipment will lead to future economic benefits accruing to the Group, these costs are capitalised. Repairs and maintenance not meeting this criterion are expensed as and when incurred.
Depreciation commences when the asset is ready for its intended use and is charged so as to write down the cost of the assets, other than freehold land, to their residual values, over their useful lives, using the straight-line method, recognised in profit or loss on the following bases:
Buildings 50 years Fixtures, fittings, plant, equipment and motor vehicles 4 to 15 years Computer hardware 3 to 8 years Leasehold improvements shorter of lease period or useful life
Useful lives and residual values are reviewed annually, at each reporting year-end and the prospective depreciation is adjusted accordingly if necessary.
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. If there is an option to purchase the leased asset and it is virtually certain that this option will be exercised, the leased asset is depreciated over the leased asset’s expected useful life.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the Income Statement.
Intangible assets comprise right of use assets, trademarks and computer software and are measured initially at purchased cost. Right of use assets are measured at cost, which is calculated based on the site negotiation agreement. Research costs are expensed as incurred. Development costs are recognised as an expense in the period in which they are incurred unless the technical feasibility of the asset has been demonstrated and the intention to complete and utilise the asset is confirmed. Capitalisation commences when it can be demonstrated how the intangible asset will generate probable future economic benefits, that it is technically feasible to complete the asset, that the intention and ability to complete and use the asset exists, that adequate financial, technical and other resources to complete the development are available and the costs attributable to the process or product can be separately identified and measured reliably. Where development costs are recognised, it has a finite useful life and is amortised over its useful life on a straight-line basis and is tested for impairment if indications of impairment exist. Intangible assets are measured at cost less accumulated amortisation, and reduced by any accumulated impairment losses.
The useful lives of intangible assets are assessed as either finite or indefinite. The Group has no intangible assets with indefinite useful lives other than goodwill which is detailed separately.
For intangible assets with finite useful lives, amortisation is charged so as to write off the asset over the estimated useful life, to its residual value, using the straight-line method, on the following basis:
Trademarks 10 years Right of use 10 years Computer software 3 to 8 years
Useful life is reviewed annually, at each reporting period and the prospective amortisation is adjusted accordingly if necessary.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the intangible asset and is recognised in the Income Statement.
Impairment of non-financial assets
At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets (excluding goodwill) to determine whether there is any indication that those assets may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount for an individual asset, the recoverable amount is determined for the CGU to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGUs, or otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified.
The recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used.
If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately in the Income Statement.
An assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s (or CGUs) recoverable amount. Where an impairment loss subsequently reverses, the carrying amount of an asset (or CGU) is increased to the revised estimate of its recoverable amount. This is done so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or CGU) in prior years. A reversal of an impairment loss is recognised immediately in the Income Statement.
Goodwill is tested at least annually for impairment as indicated above. However, impairment losses relating to goodwill cannot be reversed in future years.
Revenue of the Group comprises net sales, royalties and franchise fees, investment income, property rentals, management and administration fees, commissions and fees, dividends, distribution income, income from insurance premium contributions and excludes value-added tax. Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured, regardless of when payment is being made. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, volume rebates, returns and sales-related taxes. Payment is usually received via cash, debit card or credit card. Related card transaction costs are recognised in the Income Statement as other operating expenses. The Group assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The specific recognition criteria described below must also be met before revenue is recognised.
- Sales of merchandise
Revenue is recognised when the significant risks and rewards of ownership have passed to the buyer, usually when the goods are delivered and title has passed. Revenue from the sale of gift cards is recognised when they are redeemed by customers in exchange for products supplied by the Group.
- Logistics services
Revenue is earned from delivering goods to customers.
- Interest income
Revenue is accrued on a time apportionment basis, by reference to the principal outstanding and the effective interest rate.
- Dividend income
Revenue is recognised when the shareholders’ right to receive payment has been established, which is generally when shareholders approve the dividend.
- Property rental
Property rental receivable under operating leases is credited to profit or loss on a straight-line basis over the term of the relevant lease.
Commissions are recognised on an accrual basis in accordance with the substance of the relevant agreement when the sale which gives rise to the commission has occurred.
Other revenue is recognised on the accrual basis in accordance with the substance of the relevant agreements and measured at fair value of the consideration receivable.
Where the Group enters into sales transactions involving a range of the Group’s products and services, the Group applies the revenue recognition criteria set out above to each separately identifiable component of the sales transaction. The consideration received from these multiple-component transactions is allocated to each separately identifiable component in proportion to its relative fair value.
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date. The arrangement is assessed for whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.
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.
Assets held under finance leases are capitalised at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor, net of finance charges, is included in the Statement of Financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the Income Statement.
A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.
Rentals payable under operating leases are charged to the Income Statement on a straight-line basis over the term of the relevant lease. Contingent rental costs are expensed when incurred.
The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (i.e. its functional currency). For the purpose of the Group Annual Financial Statements, the results and financial position of each entity are expressed in the functional currency of the Group, which is the presentation currency for the Group Annual Financial Statements (South African Rand).
Transactions and balances
Transactions denominated in foreign currencies are initially recorded at their functional currency spot rates on the dates of the transactions.
At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are translated using functional currency spot rates on the reporting date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated using functional currency spot rates on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the functional currency spot rates at the date of the initial transactions.
Exchange differences arising on the settlement and translation of monetary items are included in the Income Statement for the year. Exchange differences arising on the translation of non-monetary items carried at fair value are included in the Income Statement for the year. However, where fair value adjustments of non-monetary items are recognised in other comprehensive income, exchange differences arising on the translation of these non-monetary items are also recognised in other comprehensive income.
On consolidation, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the reporting date. Income and expense items are translated at exchange rates prevailing at the dates of the transactions where possible, or at the average exchange rates for the year. Exchange differences are recognised in other comprehensive income and transferred to the Group’s foreign currency translation reserve. Such translation differences are recycled in the Income Statement in the year in which the foreign operation is disposed of, and is recognised as part of the gain or loss on disposal of the foreign operation.
On consolidation, exchange rate differences arising from the translation of the net investment in foreign operations are also taken to the foreign currency translation reserve (FCTR). The Group’s net investment in a foreign operation is equal to the equity investment plus all monetary items that are receivable from or payable to the foreign operation, for which settlement is neither planned nor likely to occur in the foreseeable future.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the spot rate on the reporting date.
Retirement benefit costs
Group companies operate various pension schemes. The schemes are funded through payments to trustee-administered funds in accordance with the plan terms.
A defined-contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior years.
The Group’s contributions to defined-contribution plans in respect of services rendered in a particular year are recognised as an expense in that year. Additional contributions are recognised as an expense in the year during which the associated services are rendered by employees.
Post-retirement healthcare benefits
The Group provides for post-retirement medical benefits, to qualifying employees and pensioners in certain companies within the Group. The expected costs of these benefits are accrued over the period of employment based on past services and charged to the Income Statement as employee benefits. This post-retirement medical benefit obligation is measured at present value by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid and that have the terms to maturity approximating the terms of the related post-employment liability. The future cash outflows are estimated using amongst others the following assumptions: health-care cost inflation; discount rates; salary inflation and promotions and experience increases; expected mortality rates; expected retirement age; and continuation at retirement. Valuations of this obligation are carried out annually by independent qualified actuaries in respect of past-service liabilities using the projected unit credit method. Actuarial gains or losses and settlement premiums, when they occur, are recognised immediately in other comprehensive income and as employee benefits in the Income Statement respectively.
The cost of all short-term employee benefits is recognised as an expense during the period in which the employee renders the related service.
Liabilities for employee entitlements to wages, salaries and leave represent the amount that the Group has as a present obligation, as a result of employee services provided to the reporting date, to the extent that such obligation can be reliably estimated. The accruals have been calculated at undiscounted amounts based on current wage and salary rates.
Income tax expense represents the sum of the tax currently payable and deferred tax.
Current income tax
The tax charge payable is based on taxable profit for the year and any adjustment to tax payable/receivable relating to the prior year. Taxable profit differs from profit as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates and tax laws that have been enacted or substantively enacted by the reporting date in the countries where the Group operates and generates taxable income.
Current income tax is recognised in the Income Statement, except when it relates to items recognised directly in equity, in which case it is recognised in other comprehensive income and not in the Income Statement. Where applicable tax regulations are subject to interpretation, management will raise the appropriate provisions.
The recognition, measurement and classification of interest and tax-related penalties or damages are accounted for in terms of IAS 37 Provisions, Contingent Liabilities and Contingent Assets and are recognised in profit or loss.
Deferred tax is accounted for using the liability method in respect of temporary differences arising between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit.
Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences, and the carry forward of unused tax credits and any unused tax losses to the extent that it is probable that taxable profit will be available against which these can be utilised. Deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities, which affects neither the taxable profit nor the accounting profit at the time of the transaction.
In respect of taxable temporary differences associated with investments in subsidiaries deferred tax liabilities are not raised when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. In respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each reporting 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. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply to the year when the asset is realised or the liability settled, using tax rates and tax laws that have been enacted or substantively enacted by the reporting date. Deferred tax is recognised in the Income Statement, except when it relates to items credited or charged to other comprehensive income or directly to equity, in which case the deferred tax is recognised in either other comprehensive income or directly in equity.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
Income, expenses, assets and liabilities are recognised net of the amount of sales tax, except when the sales tax is not recoverable from, or payable to, the taxation authority, in which case it is recognised as part of the underlying item. The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of other receivables or payables in the Statement of Financial Position.
Any tax on capital gains is deferred if the proceeds of the sale of the assets are invested in similar assets, but the tax will ultimately become payable on sale of that similar asset.
Inventories which consist of food, liquor, general merchandise and home improvement merchandise, are valued at the lower of cost and net realisable value. Cost is calculated on the weighted-average method. The cost of merchandise is the net of: invoice price of merchandise; insurance; freight; customs duties; an appropriate allocation of distribution costs; trade discounts; rebates and settlement discounts. Rebates and discounts received as a reduction in the purchase price of inventories are deducted from the cost of those inventories. Rebates earned on the sale of products based on advertising requirements are regarded as a reimbursement of costs already incurred in general (i.e. not linked to inventories) and is deducted from cost of sales. Obsolete, redundant and slow-moving items are identified on a regular basis and are written down to their estimated net realisable values. The amount of the write down is recognised as an expense in the Income Statement in the year in which it occurs. A new assessment is made of net realisable value in each subsequent year. When the circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realisable value because of changed economic circumstances, the amount of the write down is reversed, so that the new carrying amount is the lower of the cost and the revised net realisable value. The reversal is recorded in the Income Statement.
Financial assets and financial liabilities are recognised on the Group’s Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument.
Financial assets and liabilities are offset and the net amounts presented in the Statement of Financial Position when, and only when, the Group has a legal right to offset the amounts and intend either to settle on a net basis or to realise the asset and settle the liability simultaneously.
Financial instruments are initially recognised when the Group becomes party to the contractual terms of the instrument. They are initially measured at fair value including transaction costs unless they are classified at fair value through profit or loss, in which case the transaction costs are expensed immediately. Subsequent to initial recognition, these instruments are measured in accordance with their classification as set out below.
Financial assets are classified into the following specified categories:
- Fair value through profit or loss (FVTPL)
These include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives are covered separately and have their own accounting policy ‘Derivative financial instruments and hedge accounting’.
- Loans and receivables
These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
- Held-to-maturity investments
These are non-derivative financial assets with fixed or determinable payments and fixed maturities and the Group has the positive intention and ability to hold them to maturity.
- Available-for-sale investments
These include equity investments and debt securities. Equity investments classified as available-for-sale are those that are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities are those that are intended to be held for an indefinite period of time and that may be sold for liquidity needs or in response to changes in market conditions. The Group holds no debt securities classified as available-for-sale.
The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.
Financial assets are subsequently measured according to their category classification:
- Fair value through profit or loss (FVTPL)
These are held at fair value and any adjustments to fair value are taken to the Income Statement.
- Loans and receivables
These are held at amortised cost using the effective interest rate method less any impairment losses recognised to reflect irrecoverable amounts. Amortised cost is calculated considering any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. Amortisation is recognised in finance income in the Income Statement. Impairment losses on loans and receivables are recognised in other operating costs in the Income Statement.
- Held-to-maturity investments
These are held at amortised cost using the effective interest rate method less any impairment losses recognised to reflect irrecoverable amounts. Amortised cost is calculated considering any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. Amortisation is recognised in finance income in the Income Statement. Impairment losses on loans and receivables are recognised in other operating costs in the Income Statement.
- Available-for-sale investments
These are held at fair value and any adjustment to fair value is recognised as other comprehensive income as a non-distributable reserve until the investment is derecognised, at which time the cumulative gain or loss is reclassified to the Income Statement and recognised in other operating costs. Where the investment is determined to be impaired, the cumulative gain or loss is reclassified to the Income Statement.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset.
A financial asset is derecognised when the rights to receive cash flows have expired or the Group has transferred its right to receive cash flows from the asset, or has assumed an obligation to pay the received cash flows in full without material delay to the third party (where the Group has transferred the risk and rewards of the asset or has transferred control of the asset).
At each reporting date, the Group reviews whether there is any objective evidence that a financial asset may be impaired as a result of one or more events that have occurred since the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset. Where objective evidence exists an impairment loss is calculated.
- Financial assets carried at amortised cost
The impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The discount rate applied is the original effective interest rate and where a loan has a variable interest rate, the discount rate is the current effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised. The recovery is credited to the Income Statement.
Trade receivables are recognised net of an allowance for impairment. An allowance for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the allowance is the difference between the carrying amount of the receivable and the recoverable amount, being the present value of the expected cash flows, discounted at the original effective interest rate. Any resulting impairment losses are included in other operating costs in the Income Statement. When a receivable is uncollectible, it is written off against the allowance for impairment for receivables. Subsequent recoveries of amounts previously written off are recognised in other operating costs in the Income Statement.
- Available-for-sale investment
For available-for-sale financial assets, the Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. ‘Significant’ is evaluated against the original cost of the investment and ‘prolonged’ against the period in which the fair value has been below its original cost.
The impairment loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss previously recognised. Impairment losses on equity investments are not reversed through the Income Statement; increases in fair value of the instrument that can be objectively related to an event occurring after the recognition of the impairment, are recognised directly in other comprehensive income.
Effective interest rate method
This is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating interest income and finance costs, over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts and payments through the expected life of the financial asset or financial liability, or, where appropriate, a shorter period. Interest is recognised on an effective interest basis for financial instruments other than those financial assets designated as at fair value through profit or loss and available-for-sale. Discounting of financial instruments carried at amortised cost is omitted where the impact of discounting is considered to be immaterial.
Financial liabilities and equity
Financial liabilities are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Financial liabilities are classified into the following specified categories:
- Fair value through profit or loss (FVTPL)
These include financial liabilities held for trading and financial liabilities designated upon initial recognition at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives are covered separately and have their own accounting policy ‘Derivative financial instruments and hedge accounting’.
- Liabilities at amortised cost
These are non-derivative financial liabilities with fixed or determinable payments that are not quoted in an active market.
The classification depends on the nature and purpose of the financial liabilities and is determined at the time of initial recognition. All financial liabilities are initially recognised at fair value and, in the case of liabilities at amortised cost, net of directly attributable transaction costs.
Financial liabilities are subsequently measured according to their category classification:
- Fair value through profit or loss (FVTPL)
Fair value gains and losses on liabilities at fair value through profit or loss are recognised in the Income Statement.
- Liabilities at amortised cost
These are held at amortised cost using the effective interest rate method. Amortised cost is calculated considering any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. Amortisation costs are recognised in finance costs in the Income Statement in accordance with the Group’s policy on borrowing costs.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires. Gains or losses are recognised in the Income Statement when the liability is de-recognised. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability is substantially modified, such an exchange or modification is treated as the de-recognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the Income Statement.Derivative financial instruments and hedge accounting
The Group’s activities expose it primarily to the financial risks of changes in foreign exchange rates and interest rates.
The Group uses foreign exchange forward contracts to hedge its exposure to foreign currency fluctuations relating to certain firm trading commitments. The use of financial derivatives is governed by the Group’s policies approved by the Board, which provide written principles on the use of financial derivatives consistent with the Group’s risk management strategy. At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are assessed on an on-going basis to determine that they have been highly effective throughout the financial reporting periods for which they were designated. The Group does not trade in derivative financial instruments for speculative purposes.
Derivative financial instruments are initially measured at fair value on the contract date, and are re-measured to fair value at subsequent reporting dates. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
The effective portion of the changes in fair value of derivative financial instruments that are designated and qualify as cash flow hedges are recognised in other comprehensive income in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the Income Statement. All cumulative gain or loss on the hedging instrument recognised in other comprehensive income, is retained in equity until the forecast transaction is recognised in the Income Statement. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in other comprehensive income is reclassified to the Income Statement.
When the hedge is sold, expired, terminated, exercised, or no longer qualifies for hedge accounting the net cumulative gain or loss recognised in other comprehensive income is transferred to the Income Statement.
All above-mentioned references to Income Statement recognitions are processed through cost of sales.
The Group does not hold any other fair value hedges or hedges of a net investment in a foreign operation.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, deposits held on call with banks, investments in money-market instruments that are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value, and bank overdrafts. For the purpose of the Statement of Cash Flows, the Group‘s bank overdraft is included within cash and cash equivalents.
The Company’s own equity instruments that are reacquired are recognised at cost and deducted from equity. No gain or loss is recognised in the Income Statement on the purchase, sale, issue or cancellation of the Company’s own equity instruments. Voting rights related to treasury shares are nullified for the Group and no dividends are allocated to them. Share options exercised during the reporting year are satisfied with treasury shares, and where required, shares purchased in the market. Any difference between the exercise price and the market price is recognised as a gain or loss in the Statement of Changes in Equity.
Equity, reserves and dividend payments
Share capital represents the nominal value of shares that have been issued.
Share premium includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of shares are deducted from share premium, net of any related income tax benefits. The cost of treasury shares acquired is recognised as a reduction of share premium.
Other components of equity include the following:
- Re-measurements of net defined-benefit liability – comprises the actuarial losses from changes in demographic and financial assumptions and the return on plan assets;
- Translation reserve – comprises foreign currency translation differences arising from the translation of financial statements of the Group’s foreign entities into ZAR; and
- Reserves for Available for Sale financial assets and cash flow hedges – comprises gains and losses relating to these types of financial instruments and
- Share-based employee remuneration.
Retained profit includes all current and prior period retained profits.
All transactions with owners of the parent are recorded separately within equity.
Dividend distributions payable to equity shareholders are included in other liabilities when the dividends have been approved in a Directors’ meeting prior to the reporting date.
Provisions for product warranties, legal disputes, onerous contracts or other claims are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation. Provisions are measured at management’s best estimate of the expenditure required to settle the obligation at the reporting date, and are discounted to present value where the effect is material at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The unwinding of discounts is recognised as a finance cost. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract.
Any reimbursement that the Group can be virtually certain to collect from a third party with respect to the obligation is recognised as a separate asset. However, this asset may not exceed the amount of the related provision.
No liability is recognised if an outflow of economic resources as a result of present obligations is not probable. Such situations are disclosed as contingent liabilities unless the outflow of resources is remote.
The Group issues equity-settled share-based payments to employees who are beneficiaries of the various Group Share Incentive Schemes. Equity-settled share-based payments are measured at the fair value (excluding the effect of non-market-based vesting conditions) of the equity instruments issued at the date of the grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed in the Income Statement on a straight-line basis over the vesting period with a corresponding increase in other reserves in equity, based on the Group’s estimate of equity instruments that will eventually vest and adjusted for the effect of non-market-based vesting conditions. The cumulative expense recognised at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest.
Fair value is measured by use of binomial and lattice models. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
Full share grants awarded may be settled by way of a purchase of shares in the market, use of treasury shares or issue of new shares. If new shares are issued to equity-settle full share grants, the proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium.
Where shares are held or acquired by subsidiary companies for equity compensation plans, they are treated as treasury shares. Any gains or losses on vesting of such shares are recognised directly in equity.
The effect of all full share grants issued under the share-based compensation plan is taken into account when calculating diluted earnings and diluted headline earnings per share.
All borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Capitalisation of the borrowing costs begins on commencement date and ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Should active development of the qualifying asset be suspended, capitalisation of the borrowing costs during this period is also suspended. General borrowing costs are capitalised by calculating the weighted average expenditure on the qualifying asset and applying a weighted-average borrowing rate to the expenditure. Specific borrowing costs are capitalised when the borrowing facility is utilised specifically for the qualifying asset less any investment income on the temporary investment of these funds. All other borrowing costs are recognised as an expense in the Income Statement in the year in which they are incurred. Borrowing costs consist of interest and other costs that the Group incurs in connection with the borrowing of funds.
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s operating results are reviewed regularly by the Group’s Executive Committee to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. All inter-segment transfers are carried out at arm’s length prices. For management purposes, the Group uses the same measurement policies as those used in its Group Annual Financial Statements. In addition, corporate assets which are not directly attributable to the business activities of any operating segment are not allocated to a segment.
Cost of sales
Cost of sales primarily comprises the cost of goods sold and services provided, including an allocation of direct overhead expenses, net of supplier rebates, and costs incurred that are necessary to acquire and store goods. Cost of sales also includes: the cost to distribute goods to customers where delivery is invoiced; inbound freight costs; internal transfer costs between distribution centres and stores; warehousing costs and the cost of other shipping and handling activities; any write-downs and reversals of write-downs to inventory; and any foreign currency exposure, including reclassified gains and losses on foreign currency hedging instruments, relating directly to goods imported.
- + 2. Critical accounting judgements and key sources of estimation uncertainty
Critical judgements in applying the Group’s accounting policies In the process of applying the Group’s accounting policies, which are described above, management has not made any critical judgements that have a significant effect on the amounts recognised in the Financial Statements, except for: Classification of leases as financing or operating in nature The Group enters into commercial property leases for the majority of its stores. Where management has determined, based on an evaluation of the terms and conditions, that the lessor retains all significant risks and rewards of these properties, it will account for the contracts as operating leases. Business combination versus asset acquisition During the prior year all of the property acquisitions were accounted for as asset acquisitions. The Directors assessed the properties acquired and concluded that in their view the acquisitions were property acquisitions in terms of IAS 16 Property, Plant and Equipment and were therefore accounted for in terms of that standard. In the opinion of the Directors the properties did not constitute a business as defined in terms of IFRS 3 Business Combinations, as there were not adequate processes identified within the properties to warrant classification as businesses. Key sources of estimation uncertainty Deferred tax assets Deferred tax assets are raised to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised, as well as the acceptability and ability to execute tax planning strategies in respect of old and new stores. Assessment of future taxable profit is performed at every reporting date, in the form of future cash flows using a suitable growth rate, as well as the acceptability and ability to execute tax planning strategies in respect of old and new stores. Details of deferred taxation can be found in note 18. In addition, significant judgement is required in assessing the impact of any legal or economic limits or uncertainties in various tax jurisdictions. Property, plant and equipment and other intangible assets Property, plant and equipment and other intangible assets are depreciated over their useful lives taking into account, where appropriate, residual values. Assessment of useful lives and residual values are performed annually, taking into account factors such as technological innovation, maintenance programmes, market information and management considerations. In assessing the residual value of an asset, its remaining life, projected disposal value and future market conditions are taken into account. Detail on property, plant and equipment and other intangible assets can be found in note 13 and 15 respectively. Goodwill impairment Determining whether goodwill is impaired requires an estimation of the value in use of the CGUs (or group of CGUs) to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the CGU (or group of CGUs) and a suitable discount rate in order to calculate the present value. The carrying amount of goodwill at the reporting date was R 2,589.4 million (December 2014: R2,542.9 million). Detail on goodwill can be found in note 14. Inventory provisions Inventory provisions include shrinkage, obsolescence, unearned rebates and write-downs which take into account historical information related to sales trends, aging profiles, market factors and stock counts which impact the expected write-down between the estimated net realisable value and the original cost. In addition, consideration is also given to the method and period used to determine percentages to apply to aged inventory as a result of changing trends. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Details on the provisions can be found in note 19. Allowance for doubtful debts The Group assesses its doubtful debt allowance at each reporting date. Key assumptions applied are the estimated debt recovery rates and the future market conditions that could affect recovery. Details of the allowance can be found in note 20. Net investment in foreign operations Certain loans with the Group’s foreign investments are designated as part of the Group’s net investment as they are not expected to be repaid in the foreseeable future. This results in the foreign exchange differences on the portion of the loans that are viewed as ‘capital contributed’ being recorded in equity under the Foreign Currency Translation Reserve as required per IAS 21, The Effects of Changes in Foreign Exchange Rates, as opposed to being recognised in the Income Statement. This designation involved judgement in respect of confirming intention as well as assessing the appropriate timing of the change. Details on the Group’s foreign exchange risk management can be found in note 40. Fair value of equity awards granted The fair value of share awards and options granted in terms of IFRS 2 Share-based Payment have been obtained using the Lattice and Binomial pricing models respectively. Assumptions include expected volatility, expected life, risk-free rate and expected dividend yield. By obtaining an external valuation from accredited valuers and through consultation with various financial institutions, management is of the opinion that the risk relating to estimation uncertainty has been mitigated. Details of the valuations can be found in note 29. Provision for post-retirement medical aid contributions Post-retirement healthcare benefits are provided to certain retired employees. Actuarial valuations are performed to assess the financial position of the fund. Assumptions used include the discount rate, healthcare cost inflation, mortality rates, withdrawal rates and membership. By obtaining an external valuation from accredited valuers, management is of the opinion that the risk relating to estimation uncertainty has been mitigated. Details can be found in note 25 and note 27. Taxation The Group is subject to taxes in numerous jurisdictions. Significant estimate is required in determining the worldwide accrual for income taxes. There are many transactions and calculations during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated uncertain income tax positions based on best informed estimates of whether additional income taxes will be due. Where the final income tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current income tax and deferred income tax assets and liabilities in the period in which such determination is made. Details of taxation can be found in note 10.
- + 3. Technical Review
Standards or Interpretations that became effective in the current period
The following new standards and amendments to existing standards were adopted in the current financial reporting period and had no significant effect on the Group’s reported results:Standard/InterpretationPronouncementDescriptionIFRS 2 Share -Based PaymentAmendments resulting from Annual Improvements 2010-2012 Cycle (Definitions revised)The IASB identified the need to clarify the definition of 'vesting conditions' in IFRS 2 to ensure the consistent classification of conditions attached to a share-based payment. Previously, this IFRS did not separately define a 'performance condition' or a 'service condition', but instead described both concepts within the definition of 'vesting conditions'. The IASB decided to separate the definitions of a 'performance condition' and a 'service condition' from the definition of a 'vesting condition' and thus make the description of each condition more clear.
This amendment did not have any financial or disclosure impact on the Group's results.IFRS 3, Business CombinationsAmendments resulting from Annual Improvements 2010-2012 Cycle (Measurement requirements for all contingent assets and liabilities)
The objective of this amendment is to clarify certain aspects of accounting for contingent consideration in a business combination. The IASB noted that the classification requirements for contingent consideration were unclear as to when 'other applicable IFRSs' would need to be used to determine the classification of contingent consideration as either a financial liability or an equity instrument. Contingent consideration that is within the scope of IFRS 9 (IAS 39) shall be measured at fair value at each reporting date with changes in fair value recognised in profit or loss.in accordance with IFRS 9 (IAS 39). However, if the contingent consideration does not fall within the scope of IFRS 9 (IAS 39) it shall be measured at fair value at each reporting date with changes recognised in profit or loss.
This amendment did not have any financial or disclosure impact on the Group's results.
Amendments resulting from Annual Improvements 2011-2013 Cycle (Scope paragraph for joint arrangement)
The amendment clarifies that IFRS 3 excludes from its scope the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.
This amendment did not have any financial or disclosure impact on the Group's results.IFRS 8, Operating SegmentsAmendments resulting from Annual Improvements 2010-2012 Cycle (Amendments to disclosure requirements)The IASB has issued an amendment to assist in clarifying the aggregation criteria. Operating segments may be combined/aggregated if aggregation is consistent with the core principle of the standard, if the segments have similar economic characteristics and if they are similar in other qualitative respects. If they are combined, the entity must disclose the economic characteristics (e.g. sales and gross margins) used to assess whether the segments are ‘similar’.
This amendment did not have any financial or disclosure impact on the Group's results.
The amendment also clarifies that the reconciliation of segment assets to total assets is required to be disclosed only if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities.
This amendment did not have any financial or disclosure impact on the Group's results.IFRS 13, Fair Value MeasurementAmendments resulting from Annual Improvements 2010-2012 Cycle (Amendments to measurement requirements)The amendments clarify the requirements for those short-term receivables and payables.
This amendment did not have any financial or disclosure impact on the Group's results.Amendments resulting from Annual Improvements 2011-2013 Cycle (Clarification of portfolio exception)
The scope of the portfolio exception for measuring the fair value of a group of financial assets and liabilities on a net basis was amended to clarify that it includes all contracts that are within the scope of, and accounted for in accordance with IAS 39 or IFRS 9, regardless of whether they meet the definitions of a financial asset or financial liability as per IAS 32.
This amendment did not have any financial or disclosure impact on the Group's results.IAS 16, Property, Plant and Equipment and IAS 38, Intangible AssetsAmendments resulting from Annual Improvements 2010-2012 Cycle (Amendments to Revaluation method)The objective of this amendment is to clarify the requirements for the revaluation method in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets to address concerns about the calculation of the accumulated depreciation or amortisation at the date of the revaluation. The IFRS Interpretations Committee reported to the IASB that practice differed in the calculation of accumulated depreciation for an item of property, plant and equipment that is measured using the revaluation method in cases where the residual value, the useful life or the depreciation / amortisation method has been re-estimated before a revaluation.
The amendment clarifies that the carrying amount of an asset is adjusted to that value in one of the following ways:
i) The gross carrying amount is adjusted consistently with the valuation (e.g. change the total or change the carrying amount to that with accumulated depreciation adjusted proportionately).
ii) The accumulated depreciation or amortisation is eliminated against the gross carrying amount of the asset.
This amendment did not have any financial or disclosure impact on the Group's results.IAS 19, Employee BenefitsAmendments for Defined Benefit PlansThe amendment clarifies the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service as a negative benefit. In addition, it permits a practical expedient if the amount of the contributions is independent of the number of years of service, and those contributions, can, but are not required, to be recognised as a reduction in the service cost in the period in which the related service is rendered.
This amendment did not have any financial or disclosure impact on the Group's results.IAS 24, Related Party DisclosureAmendments resulting from Annual Improvements 2010-2012 Cycle (Definitions and disclosures revised)The definition of related parties includes the entity, or any member of a group of which it is a part, that provides key management personnel services to the reporting entity or its parent. Details of the individual employee benefits do not need to be disclosed for an entity that provides key management personnel services. The amounts incurred for key management personnel services from an entity must be disclosed.
This amendment did not have any financial or disclosure impact on the Group's results.IAS 40, Investment PropertyAmendments resulting from Annual Improvements 2011-2013 Cycle (Interrelationship between IFRS 3 and IAS 40)The description of ancillary services in IAS 40 differentiates between investment property and owner-occupied property (i.e., property, plant and equipment).
The amendment clarifies that IFRS 3, not the description of ancillary services in IAS 40, is used to determine whether the transaction is the purchase of an asset or business combination.
This amendment did not have any financial or disclosure impact on the Group's results.
Standards or Interpretations issued but not yet effective
At the date of authorisation of these financial statements, the following relevant standards were in issue but not yet effective. The Group has elected not to early adopt any of these standards.Standard/InterpretationPronouncementDescriptionIAS 1 Presentation of Financial StatementsDisclosure Initiative
The amendment provides new requirements when an entity presents subtotals in addition to those required by IAS 1 in its audited annual financial statements. It also provides amended guidance concerning the order of presentation of the notes in the audited annual financial statements, as well as guidance for identifying which accounting policies should be included. It further clarifies that an entity's share of comprehensive income of an associate or joint venture under the equity method shall be presented separately into its share of items that a) will not be reclassified subsequently to profit or loss and b) that will be reclassified subsequently to profit or loss.
This amendment is not expected to have material disclosure impact on the Group's results.IAS 16 Property, Plant and Equipment and IAS 38, Intangible AssetsAmendments to IAS 16 and IAS 38 (Basis for depreciation/amortisation)The basis for calculation of depreciation and amortisation should be based on the expected pattern of consumption of the future economic benefits of an asset.
In estimating the basis of depreciation and amortisation, revenue generation is not considered to be an appropriate basis for measuring the consumption of economic benefits.
This amendment is not expected to have any financial or disclosure impact on the Group's results as revenue-based methods of depreciation and amortisation methods are not in use.IAS 19 Employee BenefitsAmendments resulting from Annual Improvements 2012-2014 Cycle (Clarification of requirements to determine discount rate)
The amendment clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in that currency, government bond rates must be used.
This amendment is not expected to have any financial or disclosure impact on the Group's results.IAS 27 Consolidated and Separate Financial StatementsAmendment for use of the equity method
The amendment will allow entities to use the equity method to account for the investments in subsidiaries, joint ventures and associates in the separate financial statements.
This amendment is not expected to have any financial or disclosure impact on the Group's results as investments in subsidiaries will continue to be accounted for at cost in the separate financial statements.IAS 34 Interim Financial ReportingAmendments resulting from Annual Improvements 2012-2014 Cycle (Clarification of disclosure)
The amendment allows an entity to present disclosures required by paragraph 16A either in the interim audited annual financial statements or by cross reference to another report, for example, a risk report, provided that other report is available to users of the audited annual financial statements on the same terms as the interim audited annual financial statements and at the same time.
This amendment is not expected to have any material disclosure impact on the Group's results.IFRS 5, Non-current assets Held for Sale and Discontinued OperationsAmendments resulting from Annual Improvements 2012-2014 Cycle (Clarification of classification)The amendment clarifies that non-current assets held for distribution to owners should be treated consistently with non-current assets held for sale. It further specifies that if a non-current asset held for sale is reclassified as a non-current asset held for distribution to owners or vice versa, that the change is considered a continuation of the original plan of disposal.
This amendment is not expected to have any financial or disclosure impact on the Group's results.IFRS 7, Financial Instruments: DisclosuresAmendments resulting from Annual Improvements 2012-2014 Cycle (Clarification of serving contract)
The amendment clarifies that the offsetting disclosure requirements do not apply to condensed interim financial statements, unless such disclosures provide a significant update to the information reported in the most recent annual report.
Amendments resulting from Annual Improvements 2012-2014 Cycle (Applicability of the offsetting disclosures to condensed interim financial statements)
The amendment provides additional guidance regarding transfers with continuing involvement. Specifically, it provides that cash flows excludes cash collected which must be remitted to a transferee. It also provides that when an entity transfers a financial asset but retains the right to service the asset for a fee, that the entity should apply the existing guidance to consider whether it has continuing involvement in the asset.
These amendments are not expected to have any financial or disclosure impact on the Group's results.IFRS 9 Financial InstrumentsThe IASB has issued the final version of IFRS 9, which combines classification and measurement, the expected credit loss impairment model and hedge accounting
Financial assets are measured at amortised cost, fair value through profit or loss, or fair value through other comprehensive income, based on both the entity’s business model for managing the financial assets and the financial asset’s contractual cash flow characteristics. Apart from the ‘own credit risk’ requirements, classification and measurement of financial liabilities is unchanged from existing requirements. Early adoption is permitted. The impairment requirements in the new standard are based on an expected credit loss model and replace the IAS 39 incurred loss model. Entities are required to recognise either 12-month or lifetime expected credit losses, depending on whether there has been a significant increase in credit risk since initial recognition. The measurement of expected credit losses would reflect a probability-weighted outcome, the time value of money and reasonable and supportable information. Hedge effectiveness testing must be prospective and can be qualitative, depending on the complexity of the hedge. A risk component of a financial or non-financial instrument may be designated as the hedged item if the risk component is separately identifiable and reliably measureable. The time value of an option, the forward element of a forward contract and any foreign currency basis spread can be excluded from the designation as the hedging instrument and accounted for as costs of hedging. More designations of groups of items as the hedged item are possible, including layer designations and some net positions.
Management is still assessing the impact that the new standard will have on the classification of financial assets and impairment assessments. Additional disclosures are expected. The new standard is not expected to have an impact on the Group’s hedging transactions.IFRS 10, Consolidated Financial Statements and IAS 28Sale of Contribution of Assets between an Investor and its Associate or Joint VentureThe amendment addresses the inconsistencies between the requirements of IFRS 10 Consolidated Financial Statements and those in IAS 28 dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture.
The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3: Business combinations, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture.
This amendment is not expected to have any effect on the Group as the Group currently has no recognised investments in associates or joint ventures.IFRS 11 Joint ArrangementsNew guidance
Requires the acquirer of an interest in a joint operation in which the activity constitutes a business (as defined in IFRS 3 Business Combinations) to apply all of the principles and disclosure requirements for business combinations in IFRS 3 and other IFRSs, except where those principles conflict with the guidance of IFRS 11.
This guidance is not expected to have any financial or disclosure impact on the Group's results.IFRS 10, 12, IAS 28 Investment entitiesInvestment Entities: Applying the Consolidation ExceptionThe amendment clarifies the consolidation exemption for investment entities. It further specifies that an investment entity which measures all of its subsidiaries at fair value is required to comply with the "investment entity" disclosures provided in IFRS 12. The amendment also specifies that if an entity is itself not an investment entity and it has an investment in an associate or joint venture which is an investment entity, then the entity may retain the fair value measurement applied by such associate or joint venture to any of their subsidiaries.
This guidance is not expected to have any financial or disclosure impact on the Group's results.IFRS 15 Revenue from Contracts from CustomersNew standard
IFRS 15 establishes a single, comprehensive framework for determining when to recognise revenue and the amount of revenue to be recognised. IFRS 15 replaces the previous revenue standards IAS 18 Revenue and IAS 11 Construction Contracts and the related interpretations IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue –Barter Transactions Involving Advertising Services. The new standard:
• improves the comparability of revenue from contracts with customers,
• reduces the need for interpretive guidance to address emerging revenue recognition issues, and
• provides more useful information through improved disclosure requirements.
The standard outlines the principles an entity must apply to measure and recognise revenue. The core principle is that an entity will recognise revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer.
The principles in IFRS 15 will be applied using a five-step model:
1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognise revenue when (or as) the entity satisfies a performance obligation
In addition to the five-step model, the standard also specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. Application guidance is provided in the standard to assist entities in applying its requirements to determining the consideration paid to a customer (particularly with regard to slotting fee arrangements and co-operative advertising arrangements), variable consideration, common arrangements, including licences, warranties, rights of return, principal-versus-agent considerations, options for additional goods or services, and breakage.
The new standard is more prescriptive than current IFRS and the disclosure requirements are more extensive. Management is still assessing the impact that the new standard will have on the Group’s recognition of revenue, and additional disclosure is expected.
The changes to the accounting for revenue would primarily impact revenue recognition from services, which is not significant for the Group, however revenue from sale of goods may be significantly impacted as a result of accounting for expected customer returns. The Group is still in the process of analysing the full impact of this new standard.IFRS 16 LeasesNew standard
IFRS 16 will require lessees to recognise most leases on their balance sheets as lease liabilities with corresponding right-of-use assets, similar to what is currently done for finance leases. Lessees will however be permitted to make an accounting policy election, by class of underlying asset, to apply a method like IAS 17’s operating lease accounting and not recognise lease assets and lease liabilities for leases with a lease term of 12 months or less. Lessees will also be permitted to make an election, on a lease-by-lease basis, to apply a method similar to current operating lease accounting to leases for which the underlying asset is of a low value. The accounting by lessors under the new standard is substantially unchanged from today’s accounting.
The Group is still in the process of analysing the impact of this new standard.
- + 4. Acquisition of subsidiaries and businesses
Subsidiaries and businesses acquired Purchasing Principal Date of Control December 2015 Division activity acquisition acquired Unison Risk Management Alliance Proprietary Limited Corporate Insurance broking 5 November 2015 100% Powersave and Savemore Masscash Merchandising and food 23 March 2015 100% Liquormart Ladysmith Massdiscounters Liquor store 6 August 2015 100% Liquormart Mokopane Massdiscounters Liquor store 16 August 2015 100% All of the above were accounted for as business combinations. Purchasing Principal Date of Control December 2014 Division activity acquisition acquired Micawber 269 Proprietary Limited Corporate Property Company 15 October 2014 100% Rospall Investments Proprietary Limited Corporate Property Company 31 July 2014 100% Darryl Investments Proprietary Limited Corporate Property Company 1 August 2014 100% Mikeva Cash & Carry Proprietary Limited Masscash Wholesale Company 28 April 2014 55% Mikeva Cash & Carry Proprietary Limited was accounted for as a business combination and all of the other subsidiary acquisitions were accounted for as asset acquisitions. Fair value analysis of the assets and liabilities acquired The net fair value of the assets acquired and liabilities assumed during the current financial year was R38.5 million (December 2014: R592.4 million) on the date of acquisition. Net cash outflow on acquisition December 2015 December 2014 Rm 52 weeks 52 weeks Total purchase price (38.5) (564.4) Less: Cash and cash equivalents of subsidiaries 21.6 – Net cash position for the Group (16.9) (564.4) A cash outflow of R38.5 million in the current financial year for the acquisition of the above-mentioned companies can be found in note 38.8. A cash outflow of R552.9 million in the prior financial year, relates to the acquisition of Micawber 269 Proprietary Limited, Rospall Investments Proprietary Limited and Darryl Investments Proprietary Limited. This net cash outflow for the asset acquisitions can be found in note 38.5. The acquisition of Mikeva Cash & Carry Proprietary Limited for R11.5 million can be found in note 38.8. A liability was raised on the asset acquisition of Micawber 269 Proprietary Limited in the prior financial year for R11.6 million. For further information regarding the liabilities raised refer to note 27. Goodwill arising on acquisition of businesses In the current financial year upon the acquistion of Unison Risk Management Alliance Proprietary Limited, goodwill of R0.6 million arose. In addition, the acquisition of liquor businesses within the Massdiscounters Division resulted in goodwill of R6.7 million and the acquistion of general merchandising and food businesses within the Masscash Division goodwill of a further R36.6 million. These business combinations are not considered to be significant. In the prior financial year upon the acquisition of Mikeva Cash & Carry Proprietary Limited, within the Masscash Division, goodwill of R9.7 million arose. In addition, the acquisition of liquor businesses within the Massdiscounters Division resulted in goodwill of R2.4 million. These business combinations are not considered to be significant.
- + 5. Revenue
December 2015 December 2014 Rm 52 weeks 52 weeks Sales 84,731.8 78,173.2 Other income 125.6 145.8 – Change in fair value of financial assets carried at fair value through profit or loss1 14.2 24.8 – Dividends from unlisted investments 40.3 0.3 – Royalties and franchise fees2 – 80.1 – Management and administration fees 1.5 0.7 – Property rentals 11.1 27.6 – Commissions and fees2 – 2.7 – Distribution income 9.5 7.9 – Other3 49.0 1.7 84,857.4 78,319.0 1 Additional information on financial assets carried at fair value through profit or loss can be found in note 16. 2 ‘Royalties and franchise fees’ and ‘Commissons and fees’ have been reclassified to sales prospectively in the current financial year. 3 Included within ‘other’ is the gain on forgiveness of a liability included in trade and other payables of R32.3 million.
- + 6. Impairment of assets
December 2015 December 2014 Rm Notes 52 weeks 52 weeks Freehold land and buildings1 13 16.0 9.4 Leasehold improvements2 13 3.8 9.0 Fixtures, fittings, plant and equipment2 13 5.7 6.2 Computer hardware 13 0.2 – 25.7 24.6 1The impairment of the land and buildings in the current and prior financial year relates to a property reclassified to non-current asset held for sale where the recoverable amount was determined as its fair value less costs of disposals based on the amount that could be received on selling the property (level 3 valuation). Additional information can be found in note 14 and note 21. 2The impairment of the leasehold improvements and fixtures, fittings, plant and equipment in the current and prior financial year relates to the closure of stores in the Masscash Division, where the recoverable amounts were determined as fair value less costs of disposals based on the amount that could be received on selling the items (level 3 valuation).
- + 7. Foreign exchange loss
December 2015 December 2014 Rm 52 weeks 52 weeks Foreign exchange loss from loans to African operations1 (93.7) (35.0) Foreign currency translation reserve re-classified to the Income Statement 12.7 – Foreign exchange gain arising from an investment in a trading and logistics structure (note 16) – 4.8 Foreign exchange loss arising from the translation of foreign creditors2 (68.8) (19.6) Total (149.8) (49.8) Foreign exchange currency exposures and rates Spot rate Spot rate Jurisdiction Currency December 2015 December 2014 United States USD 15.2274 11.5995 United Kingdom Pound Sterling 22.5926 18.0449 European Union Euro 16.7150 14.1944 Botswana Botswana Pula 1.3741 1.2157 Ghana Ghanaian New Cedi 3.9920 3.6107 Kenya Kenyan Shilling 0.1488 0.1281 Malawi Malawian Kwacha 0.0234 0.0249 Mauritius Mauritian Rupee 0.4236 0.3684 Mozambique Mozambican New Metical 0.3145 0.3458 Nigeria Nigerian Naira 0.0765 0.0634 Tanzania Tanzanian Shilling 0.0071 0.0068 Uganda Uganda Shilling 0.0045 0.0042 Zambia Zambian New Kwacha 1.3893 1.8265 The Group also operates in Lesotho, Namibia and Swaziland. The Lesotho Loti, the Namibian Dollar and Swazi Lilangeni are pegged to the Rand on a 1:1 basis, therefore, there is no foreign exchange exposure relating to these currencies. 1Foreign exchange loss from loans to African operations Massdiscounters, Massbuild and Masscash have provided Rand denominated loans to their African operations which are then maintained as working capital loans. These loans attract foreign exchange gains/(losses) in the African operations when translated into the functional currency of those operations at year end. Where the operations hold other monetary balances not in their functional currency, those balances also attract foreign exchange gains/(losses) when translated into functional currency at year end. In addition, through a Mauritian entity, the Group lends its African operations local currency denominated loans as start-up capital. These loans attract foreign exchange gains/(losses) in the Mauritian entity when translated into USD, its functional currency, at year end. Currently, it is the Group’s policy to naturally hedge these loans by lending to its subsidiaries in various African countries in various African currencies, thereby spreading its foreign exchange exposure across a broad basket of currencies. In addition, the Group limits its exposure to any one currency by funding a portion of the start-up capital via in-country bank loans. Refer to note 28 for more information on these foreign bank loans. The African operations trade in their local currency, which for reporting purposes is also their functional currency. The foreign exchange gains/(losses) that arises when translating the foreign operation into Rands (the Group’s presentation currency) is accounted for in the foreign currency translation reserve on the Statement of Financial Position. Additional information on these translations can be found in note 23. At 1 March 2015 the Group reassessed the designation of a number of its intercompany loans to its foreign operations in Africa, as per IAS 21 The Effects of Changes in Foreign Exchange Rates. As a result, certain loans were designated as part of the Group’s net investment in these foreign operations and the associated foreign exchange gains/(losses) have been recognised in the foreign currency translation reserve. 2Foreign exchange loss arising from the translation of foreign creditors Foreign creditors resulting from foreign stock purchases and transactions with the ultimate holding company, being Wal-Mart Stores, Inc., are foreign currency denominated and upon translation into the Group’s functional currency at year end, exchange differences arise on translation into Rands at year end. As the bulk of foreign creditors and transactions with Wal-Mart Stores, Inc. are recorded in USD’s, this exchange difference can in most part be explained by the movement of the Rand against the USD. As the Rand weakened in both periods, this resulted in an exchange loss in both periods. All of the foreign exchange gains/(losses) referred to above, other than those relating to the Group’s net investment in its foreign operatings, are recognised in the Income Statement. Foreign exchange loss arising from FEC’s The Group uses foreign exchange forward contracts (FEC’s) to hedge its exposure to foreign currency fluctuations relating to all firm trading commitments in respect of foreign stock purchases as mentioned in point 2 above. The foreign exchange movements that arise from the hedges are recognised in the Income Statement when they become ineffective or for effective hedges when the firm commitment is terminated resulting in the FEC being cancelled. The impact of ineffective hedges and cancelled hedges during the current and prior year, was insignificant. Once the FECs are de-designated as hedging instruments, movements in the fair value of the FECs are recognised in cost of sales in the Income Statement. Upon expiry of the FECs, the net cumulative gain or loss recognised in other comprehensive income is transferred to cost of sales in the Income Statement. For more information on this net cumulative gains/(losses) subsequently transferred to the Income Statement refer to note 23. For more information on the Group’s currency risk management policy refer to note 40.
- + 8. Operating profit before interest
December 2015 December 2014 Rm Notes 52 weeks 52 weeks CREDITS TO OPERATING PROFIT BEFORE INTEREST INCLUDE: Profit on disposal of tangible and intangible assets and non- current assets held for sale 14.8 10.4 CHARGES TO OPERATING PROFIT BEFORE INTEREST INCLUDE: Depreciation and amortisation (owned assets): 934.0 829.5 – Buildings 13 52.2 35.5 – Leasehold improvements 13 60.6 55.5 – Fixtures, fittings, plant and equipment 13 557.1 505.2 – Computer hardware 13 77.3 72.6 – Motor vehicles 13 54.2 46.6 – Computer software 15 127.1 108.8 – Right of use 15 5.1 4.9 – Trademarks 15 0.4 0.4 Depreciation and amortisation (leased assets): 12.2 17.1 – Buildings 13 – 1.6 – Fixtures, fittings, plant and equipment 13 0.2 2.5 – Computer hardware 13 2.8 3.6 – Motor vehicles 13 9.2 9.4 Share-based payment expense: 218.5 127.9 – Massmart Holdings Limited Employee Share Trust 29 194.7 106.7 – Massmart Black Scarce Skills Trust 29 23.8 21.2 Operating lease charges: 2,093.0 1,917.9 – Land and buildings 1,975.5 1,811.7 – Plant and equipment 86.3 74.6 – Computer hardware 1.3 1.4 – Motor vehicles 29.9 30.2 Loss on disposal of tangible and intangible assets 11.9 11.8 Fees: 149.2 126.6 – Administrative and outsourcing services 111.1 93.5 – Consulting 38.1 33.1 Auditors’ remuneration: 23.1 22.2 – Current year fee 23.1 22.2 Professional fees 7.3 2.1
- + 9. Net finance costs
December 2015 December 2014 Rm 52 weeks 52 weeks Finance costs (507.7) (386.8) – Interest on bank overdrafts and loans (506.3) (382.4) – Interest on obligations under finance leases (1.4) (4.4) Finance income 32.4 41.5 – Income from investments, bank accounts and other financial assets 32.4 41.5 Net finance costs (475.3) (345.3) Additional information on bank overdrafts, loans and finance leases can be found in note 24 and note 28. Additional information on investments and other financial assets can be found in note 16 and note 17.
- + 10. Taxation
December 2015 December 2014 Rm 52 weeks 52 weeks CURRENT YEAR South African normal taxation: Current taxation 465.6 414.7 Deferred taxation (56.4) (54.4) Foreign taxation: Current taxation 68.9 73.2 Deferred taxation (25.8) 16.9 Withholding tax1 35.0 9.9 Taxation effect of participation in export partnerships2 1.4 0.5 488.7 460.8 PRIOR YEAR UNDER/(OVER) PROVISION South African normal taxation: Current taxation 11.4 8.3 Deferred taxation (4.4) (0.9) Foreign taxation: Current taxation 0.1 4.9 Deferred taxation 9.6 12.8 Withholding tax1 0.5 – Taxation effect of participation in export partnerships2 – (2.5) 17.2 22.6 Taxation as reflected in the Income Statement 505.9 483.4 1The withholding tax relates to interest and dividends paid by foreign controlled entities. 2Two companies in the Group participate in Trencor export partnerships. As the companies are liable for the tax effect of the participation, the amount is classified as a taxation charge. Additional information on the export partnership can be found in note 16. December 2015 December 2014 % 52 weeks 52 weeks The rate of taxation is reconciled as follows: Standard corporate taxation rate 28.0 28.0 Exempt income (0.3) (0.1) Disallowable expenditure 1.3 3.2 Foreign income 0.5 1.1 Prior year under-provision 0.5 1.3 Allowances on lease premiums and improvements (0.2) (0.1) Assessed loss not utilised 2.6 2.0 Withholding tax 0.5 (1.1) Other3 (2.7) (4.5) 30.2 29.8 3 ‘Other’ includes such items as differences in foreign tax rates and capital gains tax.
- + 11. Dividends paid to shareholders
December 2015 December 2014 Rm 52 weeks 52 weeks Final cash dividend No 30 (2014: No 28) 597.1 597.0 Interim cash dividend No 31 (2014: No 29) 317.0 317.0 Total dividends paid 914.1 914.0 Dividend/distribution per share (cents) Interim 146.0 146.0 Final 275.0 275.0 Total 421.0 421.0 No 28 of 275.0 cents declared on 26 February 2014 and paid on 24 March 2014 (R597.0 million). No 29 of 146.0 cents declared on 27 August 2014 and paid on 22 September 2014 (R317.0 million). No 30 of 275.0 cents declared on 25 February 2015 and paid on 23 March 2015 (R597.1 million). No 31 of 146.0 cents declared on 26 August 2015 and paid on 21 September 2015 (R317.0 million). No 32 of 112.16 cents declared on 24 February 2016 and paid on 22 March 2016 (R243.5 million). Withholding tax of 15% was applied to the dividends declared on 25 February 2015 and paid on 23 March 2015 and the dividends declared on 26 August 2015 and paid on 21 September 2015. Withholding tax applied to the dividend declared on 24 February 2016 and paid on 22 March 2016, will be accounted for in the next financial year. The Group was acting as an agent with regards to the withholding tax paid on behalf of shareholders on dividends declared and as such, withholding tax has been included in the total amount of the dividend paid.
- + 12. Earnings per share
December 2015 December 2014 Earnings per share (cents) 52 weeks 52 weeks Basic EPS 513.5 497.8 Diluted basic EPS 506.1 492.9 Headline EPS 516.3 509.7 Headline EPS before foreign exchange movements (taxed) 567.5 526.2 Diluted headline EPS 508.8 504.7 Diluted headline EPS before foreign exchange movements (taxed) 559.3 521.1 December 2015 December 2014 Ordinary shares (number) 52 weeks 52 weeks In issue 217,136,334 217,118,072 Weighted average 216,688,802 216,907,568 Diluted weighted average 219,892,860 219,054,983 Headline earnings per share The calculation of headline earnings per share is based on the weighted average number of ordinary shares. The calculation is reconciled as follows: December 2015 December 2014 Rm 52 weeks 52 weeks Profit for the year attributable to owners of the parent 1,112.8 1,079.8 Adjustments after non-controlling interest: Impairment of assets (note 6) 25.7 24.6 Taxation on impairment of assets (2.7) – Net loss on disposal of tangible and intangible assets 2.3 1.4 Taxation on disposal of tangible assets and intangible assets (1.6) (0.3) Profit on sale of non-current assets classified as held for sale (5.2) – Taxation on profit on sale of non-current assets classified as held for sale 1.1 – Compensation from 3rd parties for tangible assets that were impaired, lost or given up (1.2) – Taxation on compensation from 3rd parties for tangible assets that were impaired, lost or given up 0.3 – Foreign currency translation reserve re-classified to the Income Statement (12.7) – Headline earnings 1,118.8 1,105.5 Foreign exchange loss (taxed) 111.0 35.9 Headline earnings before foreign exchange movements (taxed) 1,229.8 1,141.4 The tax on the foreign exchange loss was R51.5 million (Dec 2014: R13.9 million). Diluted attributable earnings and headline earnings per share The calculation of diluted attributable earnings and headline earnings per share is based on the weighted average number of ordinary shares. The calculation is reconciled as follows: December 2015 December 2014 December 2015 December 2014 52 weeks 52 weeks 52 weeks 52 weeks Rm Rm Cents/share Cents/share Profit attributable to the owners of the parent 1,112.8 1,079.8 513.5 497.8 Adjustment for impact of issuing ordinary shares – – (7.4) (4.9) Diluted attributable earnings 1,112.8 1,079.8 506.1 492.9 Headline earnings 1,118.8 1,105.5 516.3 509.7 Adjustment for impact of issuing ordinary shares – – (7.5) (5.0) Diluted headline earnings 1,118.8 1,105.5 508.8 504.7 Diluted headline earnings before foreign exchange movements (taxed) 1,229.8 1,141.4 559.3 521.1 Weighted average shares outstanding No. of shares December 2015 December 2014 Weighted average shares outstanding for basic and headline earnings per share 216,688,802 216,907,568 Potentially dilutive ordinary shares resulting from outstanding options and awards 3,204,058 2,147,415 Weighted average shares outstanding for diluted basic and diluted headline earnings per share 219,892,860 219,054,983 Majority of the dilutive impact arises from the Employee Share Incentive Plan introduced during 2013. The Black Scarce Skills ‘B’ preference shares have a small effect on diluted basic and diluted headline earnings per share in the current year. For more information on these Schemes refer to note 29.
- + 13. Property, plant and equipment
December 2015 Cost Accumulated depreciation and impairment Net book value Rm Owned assets Freehold land and buildings 3,811.6 (161.8) 3,649.8 Leasehold improvements 923.4 (350.9) 572.5 Fixtures, fittings, plant and equipment 6,168.6 (2,812.5) 3,356.1 Computer hardware 755.9 (414.7) 341.2 Motor vehicles 341.3 (160.9) 180.4 Total 12,000.8 (3,900.8) 8,100.0 Capitalised leased assets Fixtures, fittings, plant and equipment 1.3 (0.4) 0.9 Computer hardware 13.3 (13.1) 0.2 Motor vehicles 38.1 (21.4) 16.7 Total 52.7 (34.9) 17.8 Total property, plant and equipment 12,053.5 (3,935.7) 8,117.8 December 2014 Cost Accumulated depreciation and impairment Net book value Rm Owned assets Freehold land and buildings 3,418.0 (108.4) 3,309.6 Leasehold improvements 814.8 (310.7) 504.1 Fixtures, fittings, plant and equipment 5,297.7 (2,362.1) 2,935.6 Computer hardware 658.9 (380.1) 278.8 Motor vehicles 323.4 (134.5) 188.9 Total 10,512.8 (3,295.8) 7,217.0 Capitalised leased assets Freehold land and buildings 19.7 (19.7) – Fixtures, fittings, plant and equipment 1.4 (0.2) 1.2 Computer hardware 13.5 (10.5) 3.0 Motor vehicles 36.0 (18.0) 18.0 70.6 (48.4) 22.2 Total property, plant and equipment 10,583.4 (3,344.2) 7,239.2 Certain capitalised leased property, plant and equipment is encumbered as per note 24 and note 28. Reconciliation of property, plant and equipment December 2015 Opening net book value Additions Additions through acquisitions Disposals Depreciation Foreign exchange gain/(loss) Reclassifications Impairment Classified as held for sale Closing net book value Rm Owned assets Freehold land and buildings 3,309.6 474.5 – (7.8) (52.2) (17.9) (28.9) (16.0) (11.5) 3,649.8 Leasehold improvements 504.1 156.1 – (2.1) (60.6) (5.6) (15.6) (3.8) – 572.5 Fixtures, fittings, plant and equipment 2,935.6 939.9 0.6 (5.1) (557.1) 6.9 41.0 (5.7) – 3,356.1 Computer hardware 278.8 136.4 0.4 (0.2) (77.3) 0.4 2.9 (0.2) – 341.2 Motor vehicles 188.9 69.8 – (24.7) (54.2) 0.3 0.3 – – 180.4 Total 7,217.0 1,776.7 1.0 (39.9) (801.4) (15.9) (0.3) (25.7) (11.5) 8,100.0 Capitalised leased assets Fixtures, fittings, plant and equipment 1.2 – – (0.1) (0.2) – – – – 0.9 Computer hardware 3.0 – – – (2.8) – – – – 0.2 Motor vehicles 18.0 9.2 – (1.3) (9.2) – – – – 16.7 Total 22.2 9.2 – (1.4) (12.2) – – – – 17.8 Total property, plant and equipment 7,239.2 1,785.9 1.0 (41.3) (813.6) (15.9) (0.3) (25.7) (11.5) 8,117.8 December 2014 Opening net book value Additions Additions through acquisitions Disposals Depreciation Foreign exchange gain Reclassifications Impairment Classified as held for sale Closing net book value Rm Owned assets Freehold land and buildings 2,375.1 397.2 606.4 (3.6) (35.5) (2.6) – (9.4) (18.0) 3,309.6 Leasehold improvements 468.8 103.6 – (2.0) (55.5) (1.8) – (9.0) – 504.1 Fixtures, fittings, plant and equipment 2,679.4 768.6 1.2 (17.6) (505.2) (5.7) 21.1 (6.2) – 2,935.6 Computer hardware 232.7 120.3 – (0.6) (72.6) (1.0) – – – 278.8 Motor vehicles 133.5 89.0 0.3 (8.7) (46.6) (0.3) 21.7 – – 188.9 Total 5,889.5 1,478.7 607.9 (32.5) (715.4) (11.4) 42.8 (24.6) (18.0) 7,217.0 Capitalised leased assets Freehold land and buildings 31.4 – (29.8) – (1.6) – – – – – Fixtures, fittings, plant and equipment 24.4 0.3 – – (2.5) 0.1 (21.1) – – 1.2 Computer hardware 6.3 0.4 – – (3.6) (0.1) – – – 3.0 Motor vehicles 36.5 14.1 – (1.4) (9.4) (0.1) (21.7) – – 18.0 Total 98.6 14.8 (29.8) (1.4) (17.1) (0.1) (42.8) – – 22.2 Total property, plant and equipment 5,988.1 1,493.5 578.1 (33.9) (732.5) (11.5) – (24.6) (18.0) 7,239.2 The Group has reviewed the residual values and useful lives of these tangible assets. No significant adjustment resulted from such review in the current financial year. Additions arose in the current and prior financial year as a result of new store openings and improvements to exisiting stores. The acquisition of ‘freehold land and buildings’ in the prior financial year relates to three asset acquisitions, refer to note 4, which have all been included as part of ‘Investment to expand operations’ in note 38.5. Also included in the asset acquisitions in the prior year was a property that was previously leased in terms of a finance lease by the Group, resulting in the transfer of ‘freehold land and buildings ‘ from the capitalised leased assets to owned assets. The impairment in the current and prior financial year relates to the impairment of owned assets in Masscash as a result of store closures and before the transfer of properties to non-current assets held for sale. Additional information can be found in note 6. Borrowing costs of R8 million (December 2014: R12 million) were capitalised at an average rate of 6.92% (December 2014: 6.88%) in the current financial year in the Masswarehouse, Massbuild and Massdiscounters Divisions. Refer to note 31 for capital commitments.
- + 14. Goodwill
Reconciliation of goodwill Rm December 2015 December 2014 Balance at the beginning of the year 2,542.9 2,532.0 Additions through acquisitions1 43.9 12.1 Foreign exchange gain/(loss) 2.6 (1.2) 2,589.4 2,542.9 Carrying amount of significant goodwill Rm December 2015 December 2014 Masscash 1,131.2 1,095.5 Massbuild Proprietary Limited2 901.3 901.5 The Fruit Spot Proprietary Limited 173.9 173.9 Rhino Cash and Carry Group 321.3 321.3 1Majority of the increase of goodwill in the current financial year relates to the acquisition of general merchandising, food and liquor businesses in Masscash and Massdiscounters respectively. The increase of goodwill in the prior financial year relates to the acquisition of fresh and liquor businesses in Masscash and Massdiscounters respectively. Additional information can be found in note 4. 2No disposals occured in Massbuild Proprietary Ltd in the current financial year. The movement in goodwill relates to the translation of goodwill from its functional currency to its presentation currency through the foreign currency translation reserve. Additional information can be found in note 23. Goodwill is assessed for impairment at a CGU level. This basis represents the lowest level at which management monitors goodwill. The recoverable amounts of the CGU’s have been based on value in use. The key assumptions for the value in use calculations are sales growth, trading margin, discount and terminal growth rates. Management estimates discount rates using rates that reflect current market assumptions of the time value of money and the risks specific to the CGUs. The growth rates are based on the retail industry growth forecasts, with the other key assumptions within the models being interdependent, and following the known logical principles inherent within the retail and wholesale market. A change to the underlying assumptions with Masscash such as a 4% reduction in the sales growth or a 2% reduction in the gross margin, could result in an impairment. No significant impairment loss would result from a reasonable change to the assumptions applied in testing of goodwill in the other CGUs. The Group prepares cash flow forecasts based on the CGUs’ results for the next five financial years. A terminal value is calculated based on a conservative growth rate of 3.0% – 6.0% (December 2014: 3.0%). This rate does not exceed the average long-term growth rate for the retail market. The valuation method applied is consistent with that applied in the prior financial year. The rate used to discount the forecast cash flows is 13.7% (December 2014: 11.9%) due to increased gearing and an incorporation of a retail risk premium. No significant impairment loss would result from a reasonable change to the assumptions applied in testing goodwill in the prior year.
- + 15. Other intangible assets
December 2015 Cost Accumulated amortisation and impairment Net book value Rm Owned assets Computer software 984.6 (603.0) 381.6 Right of use 50.7 (22.7) 28.0 Trademarks 4.1 (4.0) 0.1 1,039.4 (629.7) 409.7 December 2014 Cost Accumulated amortisation and impairment Net book value Rm Owned assets Computer software 867.7 (485.2) 382.5 Right of use 50.5 (17.7) 32.8 Trademarks 4.4 (3.9) 0.5 922.6 (506.8) 415.8 December 2015 Opening net book value Additions Disposals Amortisation Reclassifications Closing net book value Rm Owned assets Computer software 382.5 126.3 (0.3) (127.1) 0.2 381.6 Right of use 32.8 0.2 – (5.1) 0.1 28.0 Trademarks 0.5 – – (0.4) – 0.1 415.8 126.5 (0.3) (132.6) 0.3 409.7 December 2014 Opening net book value Additions Disposals Amortisation Reclassifications Closing net book value Rm Owned assets Computer software 359.8 131.5 – (108.8) – 382.5 Right of use 36.1 1.6 – (4.9) – 32.8 Trademarks 0.9 – – (0.4) – 0.5 396.8 133.1 – (114.1) – 415.8 The Group has reviewed the useful lives of these intangible assets and there were no significant adjustments in the current financial year. Additions arose in the current and prior financial year as a result of new store openings and new software rollouts. ‘Right of use’ intangible assets are in respect of payments to previous lessees in order to secure sites. For more information on the Group’s capital commitments, refer to note 31.
- + 16. Investments
Rm December 2015 December 2014 Financial assets designated as at fair value through profit or loss (FVTPL) Unlisted investments 139.3 125.2 – Investment in insurance cell-captive on extended warranties1 56.2 56.1 – Investment in insurance cell-captive on premium contributions2 83.0 69.0 – Investment in insurance cell-captive on credit life3 0.1 0.1 Total fair value through profit or loss 139.3 125.2 Loans and receivables Participation in export partnership – Trencor 1.3 1.7 Total loans and receivables 1.3 1.7 Available-for-sale investments Listed investments 4.9 8.4 Total available- for- sale investments 4.9 8.4 Total investments 145.5 135.3 For more information on fair value disclosure, refer to note 39. Reconciliation of financial assets carried at fair value through profit or loss Rm December 2015 December 2014 Opening balance 125.2 217.7 Fair value adjustments taken to the Income Statement 14.1 19.9 Interest on investment taken to finance income – 0.1 Realisation of the investment in the trading and logistics structure recognised in cash reserves – (117.4) Foreign exchange gains taken to the Income Statement (note 7) – 4.8 Capital contribution made to the investment in insurance cell-captives – 0.1 139.3 125.2 Further details on the investments in this category: 1The Group sells extended warranties through this vehicle facilitated by Mutual & Federal. 2The Group places general insurance through this vehicle facilitated by Mutual & Federal. 3The Group will sell credit life insurance through this vehicle by arrangement with Guardrisk. The cell arrangement was capitalised in the prior year with no life products sold during the current or prior financial year. Reconciliation of loans and receivables Rm December 2015 December 2014 Opening balance 1.7 2.1 Investment realised (0.4) (0.4) 1.3 1.7 Further details on the investments in this category: During the current and prior financial year certain Divisions participated in export partnerships, whose business is the purchase and export sale of marine containers. The participations are accounted for as loans receivables and generally mature over 10 to 15 years. Interest is earned at variable interest rates. For more information on the credit risk management of loans and receivables, refer to note 40. Reconciliation of available-for-sale investments Rm December 2015 December 2014 Opening balance 8.4 12.1 Fair value adjustment (3.5) (3.7) 4.9 8.4 Further details on the investments in this category: Listed investments include shares held on the Johannesburg Stock Exchange and the Zimbabwe Stock Exchange.
MASSMART COMPANY ANNUAL FINANCIAL STATEMENTS 2015
Notes to the Annual Group Financial Statements 1-16
For the year ended 27 December 2015