Notes to the annual financial statements
for the year ended 26 June 2011

1. Accounting policies

Basis of accounting

The financial statements have been prepared on the historical cost basis, except for the revaluation of certain non-current assets and financial instruments to fair value.

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and in a manner required by the Companies Act of South Africa. The principal accounting policies adopted are set out below.

These policies have been consistently applied for the period under review.

Basis of consolidation

The Group annual financial statements incorporate the annual financial statements of the Company (Massmart Holdings Limited) and the entities it controls. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The operating results of the subsidiaries are consolidated from the date on which effective control is transferred to the Group and up to the effective date of disposal.

Separate disclosure is made of minority interests where the Group’s investment is less than 100%. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority’s interest in the subsidiary’s equity are allocated against the interest of the Group, except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

All inter-company transactions and balances, income and expenses are eliminated in full on consolidation.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group.

Business combinations

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the 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, plus any costs directly attributable to the business combination. 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 noncurrent 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. The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

Segmental information

The Group is organised into four divisions for operational and management purposes. Massmart reports its primary business segment information on this basis and on a secondary basis by significant geographical region based on location of assets.

Comparative figures

When an accounting policy is altered, comparative figures are restated if required by the applicable accounting statement and where material. During the last financial year, the accounting policy for borrowing costs was amended. The change had no impact on the financial results of the Group and hence no restatements were required in the Group’s financials.

Interests in associates

An associate is an enterprise over which the Group has significant influence, but that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

The results, assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held-for-sale, in which case it is accounted for under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The carrying amount of such interests is reduced to recognise any decline, other than a temporary decline, in the value of individual investments. The carrying amount reflects the Group’s share of net assets of the associate and includes any goodwill on acquisition, less any impairment in the value of individual investments.

Any excess of the cost of acquisition over the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any deficiency of the cost of acquisition below the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition (ie discount on acquisition) is credited to profit or loss in the period of acquisition.

Where a Group enterprise transacts with an associate of the Massmart Group, unrealised profits and losses are eliminated to the extent of the Group’s interest in the relevant associate, except where unrealised losses provide evidence of an impairment of the asset transferred.

Goodwill

Goodwill arising on consolidation of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary or jointly controlled entity at the date of acquisition. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (ie discount on acquisition) is credited to profit or loss in the period 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 expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

On disposal of a subsidiary or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

The Group’s policy for goodwill arising on the acquisition of an associate is described under ‘Interests in associates’ above.

Non-current assets held for sale

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through 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.

Property, plant and equipment

Freehold land is shown at cost and is not depreciated. Property, plant and equipment is shown at cost less accumulated depreciation, and reduced by any accumulated impairment losses.

Property cost includes professional fees. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

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 are expensed as and when incurred.

Depreciation is charged so as to write off the cost of assets, other than land, over their estimated useful lives, using the straight-line method, 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 life and residual value is reviewed annually and the prospective depreciation is adjusted accordingly.

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.

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 profit or loss.

Intangible assets

Trademarks are measured initially at purchased cost. Intangible assets are shown at cost less accumulated amortisation, and reduced by any accumulated impairment losses.

Amortisation is charged so as to write off the cost of assets over their estimated useful lives, using the straight-line method, on the following bases:

Trademarks	10 years
Computer software	3 to 8 years

Useful life is reviewed annually and the prospective depreciation is adjusted accordingly.

Impairment of tangible and intangible assets excluding goodwill

At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets 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 cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of an asset (cash-generating unit) 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 (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Revenue recognition

Revenue of the Group comprises net sales, royalties and franchise fees, investment income, finance charges, property rentals, management and administration fees, commissions and fees, dividends and excludes value-added tax. 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 and sales-related taxes.

Sales of goods are recognised when goods are delivered and title has passed.

Interest income is accrued on a time basis, by reference to the principal outstanding and the interest rate applicable.

Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.

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.

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

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 profit or loss.

Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.

Foreign currencies

The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (ie its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in the functional currency of the Group, and the presentation currency for the consolidated financial statements.

Transactions in currencies other than the Group reporting currency (South African Rands) are initially recorded at the rates of exchange prevailing on the dates of the transactions. In order to hedge its exposure to certain foreign exchange risks, the Group has a policy of covering forward all its foreign exchange liability transactions of a trading nature (see below for details of the Group’s accounting policies in respect of such derivative financial instruments).

At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the reporting date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing 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 not retranslated.

Exchange differences arising on the settlement and retranslation of monetary items are included in profit and loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit and loss for the period. However, where fair value adjustments of non-monetary items are recognised directly in equity, exchange differences arising on the retranslation of these non-monetary items are also recognised directly in equity.

On consolidation, the assets and liabilities of the Group’s overseas operations (including comparatives) are translated at exchange rates prevailing on the reporting date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.

The financial statements (including comparatives) of foreign subsidiaries and associates that report in the currency of a hyperinflationary economy are restated in terms of the measuring unit current at the reporting date before they are translated into South African Rands.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Government grants

Government grants for staff training costs are recognised in profit or loss over the periods necessary to match them with the related costs and are deducted in reporting the related expense. Income is not recognised until there is reasonable assurance that the grants will be received.

Retirement benefit costs

Payments to defined contribution plans are charged as an expense as they fall due. There are no defined retirement benefit plans in the Group.

Post-retirement healthcare benefits

Post-retirement healthcare benefits are provided by certain Group companies to qualifying employees and pensioners. The healthcare benefit costs are determined through annual actuarial valuations by independent consulting actuaries using the projected unit credit method. Such gains or losses are recognised over the expected remaining working lives of the participating members. Adjustments are made annually through profit or loss for provisions held for members who have already retired. Actuarial gains and losses are recognised in full in the period in which they occur.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax charge payable is based on taxable profit for the 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 that have been enacted or substantively enacted by the reporting date.

Deferred taxation is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. In general, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilised. Such 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 tax profit nor the accounting profit at the time of the transaction.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

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.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

Secondary Taxation on Companies (STC) is payable on net dividends paid and is recognised as a tax charge in profit or loss in the year it is incurred.

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

Inventories, which consist of merchandise, are valued at the lower of cost and net realisable value. Cost is calculated on the weighted-average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

Financial instruments

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 are classified into the following specified categories:

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. Listed     investments are carried at market value by reference to stock exchange quoted selling prices. Loans and receivables – These are held at amortised cost less any impairment losses recognised to reflect irrecoverable amounts. Held-to-maturity investments – These are held at amortised cost less any impairment losses recognised to reflect irrecoverable amounts. Available-for-sale investments – These are held at fair value and any adjustment to fair value is taken to equity.

The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest method

This is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset or, where appropriate, a shorter period.

Income is recognised on an effective interest basis for debt instruments other than those financial assets designated as ‘at fair value through profit or loss’.

Loans and receivables

Trade receivables, loans and other receivables are measured initially at fair value, and are subsequently measured at amortised cost using the effective interest method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit and loss when there is objective evidence that the asset is impaired.

Cash and cash equivalents

Cash and cash equivalents are measured at fair value. For purposes of the statement of cash flows, cash and cash equivalents comprise cash on hand, deposits held on call with banks and 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, net of bank overdrafts.

Investments

Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs.

At subsequent reporting dates, debt securities that the Group has the express intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost using the effective interest method, less any impairment loss recognised to reflect irrecoverable amounts. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.

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.

Investments other than held-to-maturity debt securities are classified as either investments held-for-trading or as available-for-sale, and are subsequently measured at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period.

Unrealised gains and losses on available-for-sale investments are recognised directly in equity until the disposal or impairment of the relevant investment, at which time the cumulative gain or loss previously recognised in equity is included in the profit or loss for the period. Impairment losses recognised in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognised in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss.

Listed investments are carried at market value, which is calculated by reference to stock exchange quoted selling prices at the close of business on the reporting date.

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. Debt instruments issued, which carry a right to convert to equity that is dependent on the outcome of uncertainties beyond the control of both the Group and the holder, are classified as liabilities, except where conversion is certain. 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, other than derivative instruments, are recognised at amortised cost, comprising original debt less principal payments and amortisations.

Financial liabilities include finance lease obligations, interest-bearing bank loans and overdrafts, and trade and other payables. The accounting policy for finance lease obligations is outlined here.

Bank borrowings

Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings in accordance with the Group’s accounting policy for borrowing costs (see below).

Trade payables

Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method.

Equity instruments

Equity instruments are recorded as the proceeds received, net of direct issue costs.

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. 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.

The effective portion of the changes in fair value of derivative financial instruments that are designated and qualify as cash flow hedges are recognised directly in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. If the hedged firm commitment or forecast transaction results in the recognition of an asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. Amounts deferred in equity are recognised in profit or loss in the same period in which the hedged firm commitment affects profit or loss.

Changes in the fair value of derivative financial instruments that do not qualify as cash flow hedges are recognised in profit or loss as they arise.

The hedge is de-designated as a cash flow hedge at the Shipped on Board date, and discontinued when the hedging instrument is sold, expired, terminated, exercised, or no longer qualifies for hedge accounting. At the time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecast transaction is recognised in profit or loss. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to profit or loss for the period.

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that the Group will be required to settle that 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.

Share-based payments

The Group issues equity-settled share-based payments to employees who are beneficiaries of the various Group share schemes. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions.

Fair value is measured by use of a Binomial model. 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.

Borrowing costs

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. All other borrowing costs are recognised as an expense in the period in which they are incurred.

2.	Technical review
	International Financial Reporting Standards Massmart first adopted International Financial Reporting Standards (IFRS) with effect from 1 July 2005. Subsequent amendments have been made to the standards, resulting in revised issue and version dates. All these amendments have been complied with in line with the transitional provisions of that standard. There has been no impact on the business, financial or practical of any amendments become effective in the past financial year. The Group is exposed to the following suite of standards: STANDARD STANDARD’S NAME IFRSs Improvements to International Financial Reporting Standards IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Statement of Cash Flows IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events After the Reporting Period IAS 11 Construction Contracts IAS 12 Income Taxes IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 18 Revenue IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 24 Related Party Disclosures IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 29 Financial Reporting in Hyperinflationary Economies IAS 31 Interests in Joint Ventures IAS 32 Financial Instruments: Presentation IAS 33 Earnings Per Share IAS 34 Interim Financial Reporting IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IAS 41 Agriculture AC 500 Preface to South African Statements and Interpretations of Statements of Generally accepted Accounting Practice AC 502 Substantively Enacted Tax Rates and Tax Laws AC 503 Accounting For Black Economic Empowerment (BEE) Transactions AC 504 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and Their Interaction in the South African Pension Fund Environment   The Improvements to International Reporting Standards is a relatively new standard issued by the International Accounting Standards Board (IASB). This standard is due to be issued annually and is the IASB’s project that provides them with a vehicle for making non-urgent but necessary amendments to IFRSs. Some amendments involve consequential amendments to other IFRSs. Massmart has adopted the standard issued in April 2009. There were no financial or practical implications on the business. A new standard was issued in May 2010 that becomes effective for Massmart’s 2012 financial year-end. There were various other smaller amendments made to the standards which we feel are not material and thus have not listed them individually. IFRS 9 Financial Instruments was issued in January 2010 and again in December 2010, effective for year-ends beginning on or after 1 January 2013, which would mean the Group’s 2014 financial year. Early adoption is permitted, but the Group has elected not to do so. IFRS 9 is currently unfinished, and the intention is for it to replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety. In its current format, there is no financial impact on the Group’s results. However, the biggest theoretical change for the Group is the change from the four classifications of financial assets (being: fair value through profit or loss, loans and receivables, held-to-maturity and available-for-sale) to two classifications (being: assets measured at fair value through profit or loss and those measured at amortised cost). The standard does allow the entity to elect that certain equity investments be measured at fair value with value changes reported in other comprehensive income. The new standard enhances the ability of investors and other users of financial information to understand the accounting of financial assets and reduces its complexity. Four additional standards were issued but are not yet effective for the current period. They are listed below with a brief description of the amendment. These standards are all effective for year-ends beginning on or after 1 January 2013, which would mean the Group’s 2014 financial year. STANDARD STANDARD’S NAME DETAIL OF AMENDMENT IFRS 10 Consolidated Financial Statements New standard that replaces the consolidation requirements in SIC-12 Consolidation – Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements. Standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company and provides additional guidance to assist in the determination of control where this is difficult to assess IFRS 11 Joint Arrangements New standard that deals with the accounting for joint arrangements and focuses on the rights and obligations of the arrangement, rather than its legal form. Standard requires a single method for accounting for interests in jointly controlled entities IFRS 12 Disclosure of Interests in Other Entities New and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles IFRS 13 Fair Value Measurement New guidance on fair value measurement and disclosure requirements The IASB issued an exposure draft in August 2010 containing various proposals to improve the financial reporting of lease contracts, ED 288 Exposure Draft of an Amendment to Statements of Generally Accepted Accounting Practice Leases. The accounting treatment under the existing requirements depends on the classification of a lease. Classification as an operating lease results in the lessee not recording any assets or liabilities in the statement of financial position under IFRS. This results in many investors having to adjust the financial statements (using disclosures and other available information) to estimate the effects of lessees’ operating leases for the purpose of investment analysis. The proposals would result in a consistent approach to lease accounting for both lessees and lessors – a ‘right-of-use’ approach. Among other changes, this approach would result in the liability for payments arising under the lease contract and the right to use the underlying asset being included in the lessee’s statement of financial position, thus providing more complete and useful information to investors and other users of financial statements. As part of the transition, we would remove the ‘lease liability’ that currently sits in the statement of financial position resulting from Circular 07/2005 Operating Leases that required us to smooth operating leases. We anticipate the exposure draft becoming a standard in approximately two to three years. We are currently unable to estimate accurately the financial impact on the Group, although it will be material, as the change proposed has raised some concerns in the financial community. Once these issues have been clarified, we will indicate the financial impact on the Group’s results. Interpretations of Statements of Generally Accepted Accounting Practice The International Financial Reporting Interpretations Committee (IFRIC) is a committee of the International Accounting Standards Board (IASB) that assists the IASB in establishing and improving standards of financial accounting and reporting for the benefit of users, preparers and auditors of financial statements. The role of the IFRIC is to provide timely guidance on newly identified financial reporting issues not specifically addressed in International Financial Reporting Standards (IFRSs) or issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop. It thus promotes the rigorous and uniform application of IFRSs. The following IFRIC’s were issued or re-issued since the start of the financial year, or earlier but became effective for the current financial year. There is no impact on the Group from any of these IFRIC’s, and they have only been included for completeness. IFRIC NAME IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments IFRIC 4 Determining Whether an Arrangement Contains a Lease IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6 Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 9 Re-assessment of Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes IFRIC 14 IAS 19 The Limit an a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement IFRIC 15 Agreements for the Construction of Real Estate IFRIC 16 Hedges of Net Investment in a Foreign Operation IFRIC 17 Distributions of Non-cash Assets to Owners IFRIC 18 Transfer of Assets from Customers IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments An IFRIC becomes inoperative and is withdrawn when an IFRS or other authoritative document issued by the IASB that overrides or confirms a previously issued IFRIC becomes effective. Circulars A circular is issued by the Johannesburg Stock Exchange Limited (JSE) or The South African Institute of Chartered Accountants (SAICA) where guidance or clarification is required on an identified financial reporting issue on a South African platform (as opposed to an IFRIC, discussed above, that operates on an international platform). This assistance is required to establish and improve standards of financial accounting and reporting for the benefit of users, preparers and auditors of financial statements. It thus attempts to promote the rigorous and uniform application of the standards. The following circular was issued since the start of the 2011 financial year. It has no impact on the Group, and has been included for completeness. CIRCULAR NAME DATE ISSUED IMPACT ON THE GROUP Circular 1/2011 Statement of Generally Accepted Accounting Practice; International Financial Reporting Standard for Small and Medium-sized Entities March 2011 This circular has no impact on the Group. Where a circular has an impact on the Group, the results of the Group would have to be adjusted retrospectively, as if the Group had always accounted for the circular correctly. Summary The Group’s accounting policies are governed by IFRS and the AC 500 series as issued by the Accounting Practices Board and listed above. Guidance has been obtained from IFRIC’s and circulars effective on 5 October 2011, also listed above. Due to the nature and volatility of Exposure Drafts (ED’s), no review has been provided, except for the lease exposure draft specifically discussed above. The Group believes that accounting standards set the minimum requirement for financial reporting. The financial statements in this Annual Report have been prepared with the aim of exposing the reader to a very detailed view of the numbers, using a simplified approach, in the hope of facilitating a deeper and informed understanding of the business.
3.	Acquisition of subsidiaries
	3.1 Subsidiaries acquired           Control   Purchasing Principal Date of acquired   division activity acquisition (%) 2011         JD’s Cash and Carry Masscash Retail Cash and Carry 1 November 2010 100 Savemore Cash and Carry Masscash Retail Cash and Carry 15 November 2010 100 Rahme Guys Masscash Retail Cash and Carry 1 July 2010 100 Cambridge Nongome Masscash Retail Cash and Carry 1 July 2010 100 Liquorland Express Masscash Wholesale Cash and Carry 1 March 2011 100 Mica Cedar Square Massbuild Home improvement/hardware 1 September 2010 100 51% of Kangela was acquired on 29 June 2009, the prior financial year, a further 49% was acquired on 1 June 2011. 2010         Mica – Norwood Massbuild Home improvement/ hardware 15 September 2009 100 Mica – South Coast Mall Massbuild Home improvement/hardware 15 September 2009 100 Mica – Umhlanga Massbuild Home improvement/hardware 15 September 2009 100 Kangela Massbuild Home improvement/hardware 29 June 2009 51 Emsengeni Massbuild Home improvement/hardware 7 June 2010 51 Emsengeni Masscash Wholesale Cash and Carry 7 June 2010 51 Kawena Distributors Masscash Wholesale Cash and Carry 29 June 2009 51 Finro Masscash Wholesale Cash and Carry 5 October 2009 75 DF Scott Masscash Wholesale Cash and Carry 27 July 2009 51 Mikeva Masscash Wholesale Cash and Carry 20 July 2009 51 Piet Retief Liquors Masscash Wholesale Cash and Carry 1 October 2009 100 Manzini Masscash Wholesale Cash and Carry 10 May 2010 100 Trident Makopane Masscash Wholesale Cash and Carry 2 March 2010 100 Sunshine Masscash Retail Cash and Carry 29 June 2009 50,02 Astor Masscash Retail Cash and Carry 1 January 2010 75 MC Meat Distributors Masscash Distribution centre 1 December 2009 100 Cambridge Properties Corporate Property 31 March 2010 100 51% of Cambridge Food was acquired in the June 2009 financial year, a further 49% was acquired on 31 March 2010.     3.2 Analysis of assets and liabilities acquired   The net asset value of the businesses acquired during the year was R46 million (2010: R188.9 million) on the date of acquisition. 3.3 Net cash outflow on acquisition        2011 2010         Rm Rm Total purchase price (170.3) (379.3) Less: Cash and cash equivalents of subsidiary    (0.7) 9.4 Net cash position for the Group (171.0) (369.9)   The net cash outflow as reflected above can be found in note 38.8.     3.4 Goodwill arising on acquisition   Goodwill arose in the business combinations because the cost of the combination included a control premium. In addition, the consideration paid for the combination effectively included amounts in relation to the benefit of the expected synergies, revenue growth and future market development. These benefits are not recognised separately from goodwill as the future economic benefits arising from them cannot be reliably measured. Goodwill was recognised in the current and prior year on all the acquisitions listed above. Goodwill of R185.0 million (2010: R305.8 million), raised on the acquisitions reflected above is recognised in note 14.

4.	Revenue
			2011	2010
			Rm	Rm
	Sales		52,950.1	47,451.0
	Change in fair value of financial assets carried at fair value through profit or loss		56.6	42.2
	Instalment-sale finance charges		1.8	1.0
	Dividends from unlisted investments		2.1	2.3
	Royalties and franchise fees		34.3	28.7
	Management and administration fees		3.7	3.6
	Property rentals		3.4	2.8
	Commissions and fees		20.3	17.4
	Other		17.2	1.6
			53,089.5	47,550.6
5.	Impairment of assets
			2011	2010
		Notes	Rm	Rm
	Tangible assets	13	–	1.4
	Goodwill	14	10.0	0.7
	Intangible assets	15	–	1.6
			10.0	3.7

	The impairment of assets in the current year relates to the impairment of certain acquired goodwill in Masscash. The impairment of assets in the prior year relates to the impairment of computer software in Builders Warehouse due to an IT upgrade and the impairment of fixed assets in Game due to a fire in the Benoni store.
6.	Operating profit
		2011	2010
		Rm	Rm
	Credits to operating profit include:
	Foreign exchange profit	89.0	93.3
	Profit on disposal of tangible and intangible assets	2.3	6.1
	Charges to operating profit include:
	Depreciation and amortisation (owned assets):	454.1	361.7
	Buildings	10.7	5.5
	Fixtures, fittings, plant and equipment	271.9	212.2
	Computer hardware	59.7	51.7
	Leasehold improvements	36.6	30.2
	Right of use	1.9	–
	Motor vehicles	18.7	15.2
	Computer software	54.3	46.6
	Trademarks	0.3	0.3
	Depreciation and amortisation (leased assets):	22.2	21.1
	Buildings	2.0	2.0
	Fixtures, fittings, plant and equipment	3.0	2.8
	Computer equipment	6.7	4.5
	Motor vehicles	10.5	11.8
	Foreign exchange loss	161.3	181.0*
	Share-based payment expense	110.7	149.4
	Massmart Holdings Limited Employee Share Trust	68.8	79.7
	Massmart Thuthukani Empowerment Trust	33.5	57.8
	Massmart Black Scarce Skills Trust	8.4	11.9
	Operating lease charges	1,136.6	961.6
	Land and buildings	1,083.5	915.6
	Plant and equipment	35.2	32.8
	Computer equipment	3.5	3.6
	Motor vehicles	14.4	9.6
	Loss on disposal of tangible and intangible assets	6.3	9.7
	Walmart Transaction Costs	408.8	–
	Advisors’ fees	238.7	–
	Accelerated share-based payment charge	70.1	–
	Supplier Development Fund	100.0	–
	Fees payable:
	Administrative and outsourcing services	70.9	67.7
	Consulting	17.6	44.8
	Auditors' remuneration:	24.9	17.0
	Current year fee	17.3	14.0
	Prior year under provision	0.3	–
	Tax advice and reviews	4.3	1.1
	Consulting and business reviews	1.7	0.9
	Contract assignments	1.3	0.6
	Other	–	0.4

*	Foreign exchange movements relating to the cost of stock have been reallocated from ‘Foreign exchange loss’ to ‘Cost of sales’ in June 2010 (R76.6 million), in line with the Group’s accounting policy.

7.	Foreign exchange gains and losses
	2011 2010   Rm Rm Foreign exchange loss arising from loans to African operations * (52.2) (83.1) Foreign exchange gain arising from ineffective hedges 0.5 27.6 Foreign exchange loss arising from an investment in offshore trading structure (21.5) (6.8) Foreign exchange gain/(loss) arising from the translation of foreign creditors 0.9 (25.4)   (72.3) (87.7)
	* Includes foreign exchange gain/(loss) arising from the translation of other small monetary loan balances as described in the explanation below.
	The Group was exposed to the following currencies for the period under review and their year-end exchange rates were:     Spot rate Spot rate Spot rate Country Currency June 2009 June 2010 June 2011 United States US Dollar 7.9425 7.6740 6.9508 United Kingdom Pound Sterling 13.1286 11.5606 11.0958 European Union Euro 11.1480 9.4155 9.8651 Botswana Pula 1.1675 1.1134 1.0680 Malawi Malawian Kwacha 0.0572 0.0524 0.0469 Mauritius Rupee 0.2562 0.2240 0.2524 Mozambique New Metical 0.2995 0.2257 0.2456 Namibia Namibian Dollar 1.0103 1.0000 1.0000 Nigeria Naira 0.0541 0.0518 0.0449 Tanzania Tanzanian Shilling 0.0062 0.0054 0.0044 Uganda Uganda Shilling 0.0038 0.0034 0.0028 Zambia Zambian Kwacha 0.0015 0.0015 0.0015 Ghana New Cedi 5.3690 5.4126 4.6419 Source: Oanda Currency converter.         Foreign exchange loss arising from loans to African operations In Massdiscounters, a loan is initially provided to African operations as start-up capital and then maintained as a working capital loan. This loan attracts foreign exchange gains/(losses) when it is translated into the functional currency of that entity at year-end. Where the operation holds other monetary balances not in its functional currency, that balance will also attract foreign exchange gains/(losses) when translated at year-end. These balances are not material and have been ignored in the explanation below: The graph below indicates the appreciation (rise in line) or depreciation (fall in line) of each currency to the Rand in the past year: Where there is a depreciation of the African currency (alternatively, a strengthening in the Rand) the resulting impact is a foreign exchange loss on the loan. From the graph, it is evident that almost all the African currencies depreciated against the Rand by the end of the current year (only the Rupee and New Metical closed stronger against the Rand), which explains the translation exchange loss in the income statement. This pattern is consistent with the prior year. The African operations trade in their local currency, which for reporting purposes is also their functional currency. The foreign exchange gain/(loss) that arises when translating the foreign operation into Rands (the Group's presentation currency) is accounted for in the FCTR on the balance sheet. Further details on these translations can be found in note 22. Foreign exchange gain arising from ineffective hedges The Group uses foreign exchange forward contracts to hedge its exposure to foreign currency fluctuations relating to certain firm trading commitments. IAS 39 Financial Instruments: Recognition and Measurement defines the accounting treatment for cash flow hedges, which is also contained in our accounting policies. Extract from the Massmart accounting policies in note 1: "The effective portion of the changes in fair value of derivative financial instruments that are designated and qualify as cash flow hedges are recognised directly in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. If the hedged firm commitment or forecast transaction results in the recognition of an asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. Amounts deferred in equity are recognised in profit or loss in the same period in which the hedged firm commitment affects profit or loss." This foreign exchange gain arises from the ineffective hedges being recognised in profit or loss. The determination of an ineffective hedge is where the contract price moves outside of the range of 80% to 125% in relation to the underlying spot rate. Foreign exchange loss arising from an investment in offshore trading structure The Group's offshore trading structure is a US Dollar-denominated investment. The graph below shows that the Rand closed relatively stronger on the US Dollar in the current year, which gave rise to a foreign exchange loss on this investment. In the prior year, the Rand closed relatively flat on the US Dollar, yet there was a foreign exchange gain arising from this investment. This was because during the year the Group realised a portion of their investment when the Rand was relatively weak against the US Dollar with the result being a foreign exchange gain for the Group. Foreign exchange gain/(loss) arising from the translation of foreign creditors Foreign creditors resulting from foreign stock purchases are translated into functional currency at year-end and the exchange difference is accounted for in profit or loss. As the bulk of foreign creditors are recorded in US Dollars, this exchange difference can be explained by the movement in the Rand against the US Dollar. However, as payments are made to creditors throughout the year that attract different rates of exchange, the entire exchange gain/(loss) cannot be linked to the closing Rand/US Dollar movement.
8.	Hyperinflation
	In the 2007 financial year, the decision was made to prospectively deconsolidate the results of the Zimbabwean Makro operations. In terms of IAS 27 Consolidated and Separate Financial Statements, control is defined as 'the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities'. It is evident from the current social, political and economic develpoments within Zimbabwe that control does not exist. This has been evidenced through the forcing of retailers to sell goods at predetermined prices and the inablility of the Massmart Group to repatriate monies. It is Massmart's view that, throughout the 2010 financial year, it did not have control over the Zimbabwean operations and, as such, the results remained deconsolidated. On deconsolidation in 2007, the investment in Makro Zimbabwe was reflected as an 'available-for-sale' financial asset. The fair value of this asset was determined to be zero and the adjustment taken to equity as a reserve. For the period under review the fair value was again assessed as zero and, as a result, there has been no fair value movement. Details can be found in note 16. The agreement to sell Makro Zimbabwe was signed in November 2010 and was finalised in late February 2011. The loss on sale of R38.6 million represents costs relating to the disposal of the Makro Zimbabwe stores.

9.	Net finance costs
		2011	2010
		Rm	Rm
	Finance costs
	Interest on bank overdrafts and loans	131.4	81.9
	Interest on obligations under finance leases	9.0	10.7
		140.4	92.6
	Finance income
	Income from investments, receivables and bank accounts	33.2	45.9
		33.2	45.9
	Details on the loans and finance leases can be found in note 24.

10.	Taxation
		2011	2010
		Rm	Rm
	Current year
	South African normal taxation:
	Current taxation	503.1	465.5
	Deferred taxation	(20.5)	51.6
	Foreign taxation:
	Current taxation	39.5	50.1
	Deferred taxation	(0.6)	(18.2)
	Secondary taxation on companies	83.9	79.9
	Taxation effect of participation in export partnerships	0.3	0.3
	Total	605.7	629.2
	Prior year (over)/under provision:
	South African normal taxation:
	Current taxation	(15.0)	(16.7)
	Deferred taxation	(5.5)	(0.1)
	Foreign taxation:
	Current taxation	(0.1)	(4.8)
	Deferred taxation (impairment of deferred taxation assets)	0.2	0.6
		(20.4)	(21.0)
	Taxation as reflected in the Income Statement	585.3	608.2

Two 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. Details on the export partnership can be found in note 16.

		2011	2010
		%	%
	The rate of taxation is reconciled as follows:
	Standard corporate taxation rate	28.0	28.0
	Exempt income	(0.4)	–
	Disallowable expenditure	10.7	3.5
	Foreign income	0.9	(0.2)
	Prior year under-provision (including impairment)	(1.4)	(1.2)
	Secondary taxation on companies	5.6	4.6
	Other	(4.5)	(1.3)
	Effective rate	38.9	33.4