- + 1. Accounting policies
These consolidated Annual Financial Statements comprise Massmart Holdings Limited (the “Company”) and its subsidiaries (collectively the “Group”).
The Group operates retail stores in eleven operating 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 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 in all material respects with those applied in the previous financial year, except for the restatement in note xx and the change in accounting standards refer to note xx. Please refer to the prior year accounting policies for the comparative numbers in this regard specifically relating to Revenue and Financial Instruments. None of the other amendments coming into effect in the current financial year have had a material impact on the financial reporting of the Group. 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 30 December 2018. 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 control, 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.
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 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.
Property, plant and equipment
Land and buildings held for use in the supply of goods or services, or for administrative purposes, are stated in the Consolidated Statement of Financial Position at acquisition cost, including any costs directly attributable to bringing the asset to the condition necessary for it to be capable of operating in the manner intended by the Group’s management, less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
The cost of property, plant and equipment 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. Expenditure incurred on property, plant and equipment, which will lead to future economic benefits accruing to the Group, are capitalised. Repairs and maintenance not meeting this criterion are expensed as and when incurred.
Properties in the course of construction for the supply of goods or services, or for administrative purposes, are carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Such properties are classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.
Freehold land is not depreciated, but is recognised at cost less accumulated impairment losses.
All other categories are stated at cost less accumulated depreciation and accumulated impairment losses.
Depreciation commences when the asset is ready for its intended use. Depreciation is recognised so as to write off the cost of assets (other than freehold land and properties under construction) over their useful lives, using the straight-line method, on the following basis:
· 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
The estimated useful lives, and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets. However, when there is no reasonable certainty that ownership will be obtained by the end of the lease term, assets are depreciated over the shorter of the lease term and their useful lives.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.
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. The lowest level assessment is a function of whether cash inflows are significantly independent. 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. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in a subsequent year.
On disposal of the relevant CGU, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Intangible assets comprise right of use assets, trademarks and computer software
Intangible assets acquired separately
Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. The cost of right of use assets is calculated based on the site negotiation agreement.
Amortisation is recognised on a straight-line basis over their estimated useful lives, on the following basis:
· Trademarks 10 years · Right of use 10 years · Computer software 3 to 8 years
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. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
Internally-generated intangible assets – research and development expenditure
Research costs are expensed as incurred. Development expenditures on an individual project are recognised as an intangible asset when the Group can demonstrate:
- the technical feasibility of completing the intangible asset so that it will be available for use or sale;
- the intention to complete the intangible asset and use or sell it;
- the ability to use or sell the intangible asset;
- how the intangible asset will generate probable future economic benefits;
- the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
- the ability to measure reliably the expenditure attributable to the intangible asset during its development.
Following initial recognition of the development expenditure as an asset, the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over the period of expected future benefit. During the period of development, the asset is tested for impairment annually.
Intangible assets acquired in a business combination
Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost).
Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
Derecognition of intangible assets
An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised.
The acquisition of businesses is accounted for using the acquisition method.
The cost of an acquisition is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are generally recognised in profit or loss as incurred.
At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that:
- deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively;
- liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 Classification and Measurement of Share-based Payment Transactions at the acquisition date, and
- 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 are measured in accordance with that Standard.
Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognised at that date.
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.
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 assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.
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: financial assets ‘at fair value through profit or loss’ (FVTPL) and ‘Debt instruments at amortised cost’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.
- Effective interest method
The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
Income is recognised on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL.
- Financial assets at fair value through profit or loss (FVTPL)
Financial assets are classified as at FVTPL when the financial asset is (i) held for trading, or (ii) it is designated as at FVTPL.
A financial asset is classified as held for trading if:
- it has been acquired principally for the purpose of selling it in the near term; or
- on initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or
- it is a derivative that is not designated and effective as a hedging instrument.
Financial assets at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘other gains and losses’ line item.
- Debt instruments at amortised cost
Debt instruments at amortised cost (including trade and other receivables, bank balances and cash) are measured at amortised cost using the effective interest method, less any impairment.
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.
Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial.
De-recognition of financial assets
The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.
On de-recognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is not recognised in profit or loss.
On de-recognition of a financial asset other than in its entirety (e.g. when the Group retains an option to repurchase part of a transferred asset), the Group allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is not recognised in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts.
Impairment of financial assets
The Group recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.
ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. Debt instruments at amortised cost are recognised net of an allowance for ECL.
Financial liabilities and equity instruments
Classification as debt or equity
Debt and equity instruments issued by a Group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements 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 an entity after deducting all of its liabilities. Equity instruments issued by a Group entity are recognised at the proceeds received, net of direct issue costs.
Repurchase of the Company’s own equity instruments is recognised and deducted directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company’s own equity instruments.
Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’.
- Fair value through profit or loss (FVTPL)
Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss.
- Other financial liabilities
Other financial liabilities (including borrowings and trade and other payables) are subsequently measured at amortised cost using the effective interest method.
De-recognition of financial liabilities
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
Initial recognition and subsequent measurement
The Group uses derivative financial instruments, forward currency contracts respectively, to hedge its foreign currency risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
For the purpose of hedge accounting, hedges are classified as:
- Fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment
- Cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognised firm commitment
- Hedges of a net investment in a foreign operation
At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which it wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge.
Before 1 January 2018, the documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Group will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
Beginning 1 January 2018, the documentation includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the Group will assess whether the hedging relationship meets the hedge effectiveness requirements (including the analysis of sources of hedge ineffectiveness and how the hedge ratio is determined). A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements:
- There is ‘an economic relationship’ between the hedged item and the hedging instrument.
- The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship.
- The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item. Hedges that meet all the qualifying criteria for hedge accounting are accounted for, as described below:
Fair value hedges
The change in the fair value of a hedging instrument is recognised in profit or loss as forex. The change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised in profit or loss when realised. In most cases, the hedge is applied to an inventory item and this adjustment would be reflected in cost of sales.
When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in profit or loss.
Cash flow hedges
The Group used forward currency contracts as hedges of its exposure to foreign currency risk in firm commitments. The ineffective portion relating to foreign currency contracts was recognised in profit or loss as forex.
Before 1 January 2018, the Group designated all of the forward contracts as hedging instrument. Any gains or losses arising from changes in the fair value of derivatives were taken directly to the Income Statement, except for the effective portion of cash flow hedges, which were recognised in other comprehensive income and later reclassified to profit or loss when the hedge item affects profit or loss.
Beginning 1 January 2018, the Group designates only the spot element of forward contracts as a hedging instrument. The forward element is recognised in other comprehensive income and accumulated in a separate component of equity under cost of hedging reserve. During the current financial year the existing cash flow hedges were closed out.
The amounts accumulated in other comprehensive income were accounted for, depending on the nature of the underlying hedged transaction. If the hedged transaction subsequently resulted in the recognition of a non-financial item, the amount accumulated in equity was removed from the separate component of equity and included in the initial cost or other carrying amount of the hedged asset. This was not a reclassification adjustment and was not recognised in other comprehensive income for the period.
For any other cash flow hedges, the amount accumulated in other comprehensive income was reclassified to profit or loss as a reclassification adjustment in the same period or periods during which the hedged cash flows affect profit or loss.
When the cash flow hedge accounting was discontinued, the amount that had been accumulated in other comprehensive income remained in accumulated other comprehensive income to the extent the hedged future cash flows were still expected to occur.
Hedges of a net investment
Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised as other comprehensive income while any gains or losses relating to the ineffective portion are recognised in profit or loss.
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, regardless of whether that price is directly observable or estimated using another valuation technique. 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.
Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use IAS 36.
In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
- Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;
- Level 2 – Inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
- Level 3 – Inputs are unobservable inputs for the asset or liability.
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
Non-current assets held for sale
Non-current assets 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 is available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such asset. 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 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 are not depreciated or amortised once classified as a non-current asset held for sale.
Impairment of tangible and intangible assets other than goodwill
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 have suffered an impairment loss. 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 for which the estimates of future cash flows have not been adjusted. 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.
When an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but 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.
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 liabilities are recognised for taxable temporary differences except:
- where the “initial recognition exception” applies; and
- in respect of outside temporary differences relating to investments in subsidiaries.
Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, where it is probable that the asset will be utilised in the foreseeable future except:
- where the “initial recognition exception” applies; and
- in respect of outside temporary differences relating to investment in subsidiaries.
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 the 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.
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 assesses the nature of the bank overdraft at reporting date. To the extent the bank overdraft does not fluctuate between a positive and negative balance this is excluded from cash and cash equivalents but rather included in interest-bearing borrowings.
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.
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 as well as those differences arising on monetary items forming part of the Group’s net investment in its foreign operations; 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.
The Company’s own equity instruments that are reacquired are recognised at cost and deducted from share premium. 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.
Provisions for our Supplier Development Fund, asset acquisitions, post-retirement medical aid contributions, 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 these models 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 plans are taken into account when calculating diluted earnings and diluted headline earnings per share.
At settlement the net settlement arrangement is designed to meet the Group’s obligation under tax laws or regulations to withhold a certain amount in order to meet the employee’s tax obligation associated with the share based payment. This amount is then transferred, normally in cash, to the tax authorities on the employee’s behalf. To fulfil this obligation, the terms of the share-based payment arrangement may permit or require the entity to withhold the number of equity instruments that are equal to the monetary value of the employee’s tax obligation from the total number of equity instruments that otherwise would have been issued to the employee upon exercise (or vesting) of the share-based payment (‘net share settlement feature’). Where transactions meet the criteria, they are not divided into two components but are classified in their entirety as equity-settled share-based payment transactions, if they would have been so classified in the absence of the net share settlement feature.
Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts to be collected on behalf of third parties. The Group recognises revenue when it transfers control over a product or service to a customer.
Nature of goods and services
The following is a description of the principal activities performed by the Group:
The Company recognises sales revenue, net of sales taxes and estimates sales returns, at the time it sells merchandise to the customer, which is generally at till point when no further performance obligations are required. Online sales include shipping revenue is recorded upon delivery to the customer when deemed control has passed onto the customer. Generally, merchandise purchased in store, or on an online platform can be returned within 7 – 14 days of purchase. Estimated sales returns are calculated using historical experience of actual returns as a percentage of sales calculated at the end of each reporting period using the expected value method. A refund liability as applied to Revenue is recognised in provisions and a right of return asset is recognised in relation to the sales return in Inventory (and corresponding adjustment to cost of sales).
Customer purchases of gift cards, to be utilised in our stores or on our e-commerce websites, are not recognised as revenue until the card is redeemed and the customer purchases merchandise using the gift card subject to breakage. Gift cards in Massmart carry an expiration date: However, in line with the 3-year prescription period these are deemed to only expire after 3 years. A certain number of shopping cards, both with and without expiration dates, will not be fully redeemed. Management estimates unredeemed gift cards and recognises breakage in proportion to the pattern of rights exercised by the customer where it is determined the likelihood of redemption is remote. Management periodically reviews and updates its estimates for breakage.
The Group loyalty programmes provide a material right to the customer. The Group allocates a portion of the transaction price to the loyalty programme based on relative standalone selling price and is recognised upfront to the extent that a significant reversal will not occur.
Value added and Other Services
The Company recognises revenue from service transactions over the time the service is performed and when control is transferred. Services include management and administration fees, commission, installation, distribution income and brokerage fees. Generally, revenue from services is classified as a component of net sales in the Company’s Consolidated Statement of Comprehensive Income.
The principal v.s. agent analysis is made on the basis of whether or not the intermediary party controls the good or service before transferring to the customer. In the prior year the judgement applied was less prescriptive.
There is no significant financing component for contracts with customers, as the Group’s performance obligations are met within a 12-month period
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.
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 recognised immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs. Contingent rentals are recognised as expenses in the periods in which they are incurred.
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.
Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.
Retirement benefit costs and termination benefits
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 up 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.
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.
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 also the presentation currency for the Group Annual Financial Statements (South African Rand).
Transactions and balances
In preparing the financial statements of each individual Group entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions.
At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at 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 on monetary items are recognised in profit or loss in the period in which they arise except for:
- exchange differences on foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings;
- exchange differences on transactions entered into in order to hedge certain foreign currency risks; and
- exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on repayment of the monetary items.
Exchange differences arising on the translation of non-monetary items carried at fair value are recognised 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.
For the purposes of presenting these consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing at the end of each reporting period. 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 period. Exchange differences are recognised in other comprehensive income and transferred to the Group’s foreign currency translation reserve.
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. On disposal of the foreign operation, the cumulative value of any such gains or losses recorded in equity is transferred to profit or loss.
Goodwill and fair value adjustments to identifiable assets acquired and liabilities assumed through acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognised in other comprehensive income.
- + 2. Critical accounting judgements and key sources of estimation uncertainty
2. Critical accounting judgements and key sources of estimation uncertainty In the process of applying the Group’s accounting policies, which are described above, management has not made any critical judgements nor estimations 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. 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 38. Revenue recognition Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts to be collected on behalf of third parties where the Group is acting as an agent in the transaction (Shield Buying Group). The Group recognises revenue when it transfers control over a product or service to a customer. Before including any amount of variable consideration in the transaction price, the Group considers whether the amount of variable consideration is constrained. The Group determines variable consideration based on its historical experience, business forecast and the current economic conditions and assesses against these components in determining the respective constraints. In addition, the uncertainty on the variable consideration will be resolved within a short time frame. Refer to note 4 as well as the revenue accounting policy. 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 16. 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 economic 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 11 and 13 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 2,599.2 million (December 2017: R 2,596.1 million). Detail on goodwill can be found in note 12. Inventory provisions Inventory provisions include shrinkage, obsolescence 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 17. 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 23 and note 25.
- + 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:
IFRS 9 Financial Instruments
IFRS 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets.
The standard has had the following impact:
The majority of financial assets held by the Group include:
- Debt instruments – Trade and other receivables – Currently classified as loans and receivables and are measured at amortised cost. Trade and other receivables continue to qualify for measurement at amortised cost under IFRS 9 because they are held to collect contractual cash flows comprising principal and interest and held within the same business model, therefore there is no change to the classification for these assets.
- Debt instruments – Investment in insurance cell captive – Currently designated as at fair value through profit or loss and measured at fair value. Investment in insurance cell captives will continue to be measured at fair value through profit or loss under IFRS 9 due to the business model test, therefore there is no change to the classification for these assets.
- An investment in listed equity instruments traded on the JSE– these are currently classified as available for sale financial assets for which the fair value through other comprehensive income/fair value through profit and loss election is available per equity instrument upon adoption of IFRS 9. The Group has elected to measure equity instruments at fair value through other comprehensive income. The impact on transition is that there will be no impairment considerations on the equity investments and no recycling from other comprehensive income to profit or loss.
Therefore, the new guidance had a limited affect on the classification of these financial assets.
There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The derecognition rules have been transferred from IAS 39 Financial Instruments: Recognition and Measurement and have not been changed.
The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. The Group has confirmed that its current hedge relationships will qualify as continuing hedges upon the adoption of IFRS 9.
The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under IAS 39. It applies to financial assets classified at amortised cost, debt instruments measured at FVOCI, contract assets under IFRS 15 Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee contracts.
The Group primarily holds trade and other receivables which qualify for the simplified impairment approach under IFRS 9 i.e. the recognition of lifetime expected credit losses. Impairment losses are expected to be recognised earlier and will often result in a higher charge than is currently provided for due to the incorporation of forward looking information and a default rate applied to all debtors. The impact of this standard was immaterial with the impact going through as an opening retained earnings adjustment in the 2018 financial year.
The new standard also introduces expanded disclosure requirements and changes in presentation. These have changed the nature and extent of the Group’s disclosures about its financial instruments.
The Group has applied the new rules retrospectively from 1 January 2018, with the practical expedients permitted under the standard using the modified retrospective approach. The low credit risk expedient has been applied. Comparatives for 2017 will not be restated. Refer to change in accounting standards note 44.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer.
Management has extensively reviewed all revenue streams within the Group. Due to the nature of the business, the timing of recognition did not materially impact the Revenue number for IFRS 15 and there were no material open contracts on transition.
The extent of impact is the following:
- Agent v.s. principal accounting: certain transactions particularly in the Masscash Division which were recorded on a gross basis in terms of principal accounting are now recorded on a net basis in terms of agent accounting under the new guidance provided by IFRS 15, as the new standard is more prescriptive and focuses on a control assessment.
- Rights of return: IFRS 15 requires separate presentation on the Statement of Financial position of the right to recover the goods from the customer and the refund obligation, previously this was disclosed as a net value in provisions.
The impact of the above has resulted in reclassifications between sales and cost of sales in the Income Statement (approximately 5%) and other current assets and provisions (approximately R80 million).
The new standard also introduces expanded disclosure requirements and changes in presentation. These have had a limited impact to the change in nature and extent of the Group’s disclosures about its revenue.
Disclosures include the disaggregation of revenue by key categories in the segment reporting note 39.
The Group will apply the new rules retrospectively from 1 January 2018, with the practical expedients permitted under the standard using the modified retrospective approach. The Group elected to use the practical expedient for completed contracts which gave rise to an immaterial opening retained earnings adjustment for the financial year.
Comparatives for 2017 will not be restated. Refer change in accounting standards note 44 where the Group has reported what the financial statements for the current year would have been reported under the old standard.
The following amendments did not have an impact on the Group as the principals were already being applied:
- IFRS 2 Share-based Payments
Classification and Measurement of Share-based Payment Transactions
- IFRIC 22 Foreign Currency Transactions and Advance Considerations
Determining the spot exchange rate relating to advance consideration
Standards or Interpretations issued but not yet effective
At the date of authorisation of these Annual 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.
IFRS 16 Leases (effective for annual periods beginning on 1 January 2019)
IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with certain expedients allowed.
Identification of a lease
The Group has elected to grandfather the existing lease arrangements under IAS 17 and only to apply the new lease arrangement definition to leases entered into after the date of transition.
Management has extensively reviewed and abstracted all lease information using a systems implementation approach and currently is finalising the validation process of the information being produced. Management has assessed the key areas of impact on the Group’s financial statements and has identified that the following will be affected, based on the current lease commitments as at 30 December 2018:
- Lease liability to increase by approximately R9 billion.
- Right-of-use (ROU) Asset recognition to increase by approximately R7 billion.
- EBIT to increase by approximately R679 million in isolation.
- PBT to decrease by approximately R369 million in isolation.
Whilst the impact on our numbers is material, business will continue as usual, as leasing of stores will continue as part of our business operations. Whilst there is a classification change between net operating and net financing cash flows, there is no impact on overall cash flow and the net cash position will remain neutral. The new standard will not impact how we choose to finance our business nor will it distract us from our strategic priorities.
The Group has applied the practical expedient for the recognition of the ROU asset at transition. The ROU asset initially equals the lease liability at adoption date adjusted primarily for the derecognition of the lease smoothing liability and other operating lease balances.
The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others.
The Group has elected to apply the general requirements of IFRS 16 to short-term leases (i.e. one that does not include a purchase option and has a lease term at commencement date of 12 months or less).
In contrast to lessee accounting, the IFRS 16 lessor accounting requirements remain largely unchanged from IAS 17, which continue to require a lessor to classify a lease either as an operating lease or a finance lease.
The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its leases particularly in the year of the adoption of the new standard.
The standard will be applied for financial years commencing on or after 1 January 2019. The Group will apply the new rules retrospectively from 1 January 2019, with the practical expedients permitted under the standard using the modified retrospective approach. Comparatives for 2018 will not be restated.
The following amendments will not have a material impact on the Group, effective for annual periods beginning on 1 January 2019:
- IFRIC 23 Uncertainty over Income Tax Treatments
Clarifies the accounting for uncertainties in income taxes
- IFRS 9 Financial Instruments
Prepayment Features with Negative Compensation
- Annual improvements 2015-2017 cycle
The following amendments will not have a material impact on the Group, effective for annual periods beginning on 1 January 2020:
- IFRS 3 Business Combinations
Definition of a Business
- IAS 1 Presentation of Financial Statements
- IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IFRS 17 Insurance Contracts (effective for annual periods beginning on 1 January 2021)
IFRS 17 prescribes a single accounting model for all insurance and replaces IFRS 4 Insurance contracts.
The main features of this new standard are:
- An entity is required to measure insurance contracts using updated estimates and assumptions that reflect the timing of cash flows and take into account any uncertainty relating to insurance contracts.
- The financial statement of the entity will reflect the time value of money in estimated payments required to settle incurred claims.
- Insurance contracts are required to be measured based only on the obligations created by the contracts.
- An entity will be required to recognise profits as an insurance service is delivered, rather than on receipt of premiums.
- + 4. Revenue
4. Revenue December 2018 December 2017 Rm 52 weeks 53 weeks Sales1 90,941.6 93,735.2 Other income 231.0 235.1 – Change in fair value of financial assets carried at fair value through profit or loss (31.1) (13.2) – Dividends from unlisted investments 34.0 80.0 – Brokerage fees 34.5 33.0 – Property rentals 25.6 18.1 – Retirement of aged gift cards 17.3 28.9 – Insurance proceeds on business interruption 52.8 45.8 – Prescribed liabilities 19.4 8.9 – Other2 78.5 33.6 – Insurance proceeds on items of PP&E 8.0 58.8 91,180.6 94,029.1 1Refer to note 39 for further information on the disaggregation of revenue. The utilised performance obligations outstanding from the prior year was R231.6 million and the remaining performance obligations at year end in this regard is R277,5 million. 2Other includes sundry income and other insignificant items. Revenue from contracts with customers for the financial year end is R90.9 billion.
- + 5. Foreign exchange loss
5. Foreign exchange loss December 2018 December 2017 Rm 52 weeks 53 weeks Foreign exchange gain/(loss) from loans to African operations1 14.5 (7.9) Foreign exchange gain/(loss) arising from the translation of foreign creditors2 3.5 (15.6) Foreign exchange loss arising from foreign exchange contracts3 (20.7) (23.7) Total (2.7) (47.2) Foreign exchange currency exposures and rates Spot rate Spot rate Jurisdiction Currency December 2018 December 2017 United States USD 14.4718 12.4378 United Kingdom Pound Sterling 18.3824 16.8067 European Union Euro 16.5563 14.9477 Botswana Botswana Pula 1.3731 1.2347 Ghana Ghanaian New Cedi 3.0294 2.7988 Kenya Kenyan Shilling 0.1411 0.1202 Malawi Malawian Kwacha 0.0193 0.0169 Mauritius Mauritian Rupee 0.4124 0.3603 Mozambique Mozambican New Metical 0.2280 0.2004 Nigeria Nigerian Naira 0.0432 0.0372 Tanzania Tanzanian Shilling 0.0064 0.0055 Uganda Uganda Shilling 0.0039 0.0034 Zambia Zambian New Kwacha 1.2740 1.2580 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. 2Foreign exchange loss arising from the translation of foreign creditors In our operations a portion of our creditors are denominated in Rands and USD at year end, resulting in exchange differences. In the current year, as most of these creditor balances are denominated in Rands, majority of our foreign exchange loss arose as a result of the strengthening of the Rand against the average basket of African currencies. 3Foreign exchange loss arising from FEC’s In the current year the Group closed out the cash flow hedge from the prior year through sale of inventory and changed to fair value hedge accounting. 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. Upon expiry of the FECs in the prior financial year, the net cumulative gain or loss recognised in other comprehensive income is transferred to cost of sales in the Income Statement as the associated inventory is sold. For more information on this net cumulative gains/(losses) transferred to the Income Statement refer to note 21. For more information on the Group’s currency risk management policy refer to note 38.
- + 6. Operating profit before interest
6. Operating profit before interest December 2018 Restated
Rm Notes 52 weeks 53 weeks* CHARGES TO OPERATING PROFIT BEFORE INTEREST INCLUDE: Depreciation and amortisation (owned assets): 1,089.6 1,065.8 – Buildings 11 59.6 58.0 – Leasehold improvements 11 98.6 81.6 – Fixtures, fittings, plant and equipment 11 587.7 608.8 – Computer hardware 11 142.3 130.1 – Motor vehicles 11 45.3 36.9 – Computer software 13 150.7 144.8 – Right of use 13 5.4 5.6 Depreciation and amortisation (capitalised leased assets): 45.0 33.8 – Buildings 11 18.7 5.6 – Computer hardware 11 0.8 0.3 – Motor vehicles 11 25.5 27.9 Impairment and scrapping 24.0 18.9 – Freehold land and buildings 6.8 0.1 – Leasehold improvements 2.4 5.8 – Fixtures, fittings, plant and equipment 10.2 11.2 – Computer hardware 3.2 0.6 – Motor vehicles 1.4 1.2 Share-based payment expense: 27 194.6 163.7 Operating lease charges: 2,971.9 2,312.2 – Land and buildings 2,761.2 2,137.3 – Plant and equipment 101.6 92.3 – Computer hardware 2.9 2.9 – Motor vehicles 106.2 79.7 Net profit/loss on disposal of tangible and intangible assets 9.5 23.3 Fees: 531.1 254.8 – Administrative and outsourcing services 216.5 123.5 – Professional fees 264.5 92.1 – Consulting 50.1 39.2 Auditors’ remuneration: 32.3 29.9 – Current year fee 27.3 26.6 – Prior year fee 5.0 3.3 *Refer to note 41.
- + 7. Net finance costs
7. Net finance costs December 2018 Restated
Rm 52 weeks 53 weeks* Finance costs (648.8) (603.5) – Interest on bank overdrafts and loans1 (570.2) (552.6) – Interest on obligations under finance leases (78.6) (50.9) Finance income1 25.1 26.4 Net finance costs (623.7) (577.1) 1These finance charges are raised on underlying financial instruments. Additional information on loans and finance leases can be found in note 22 and note 26. The increase in finance costs is primarily due to net working capital and the Builders Distribution centre finance lease now annualised. Borrowing costs of R53,6 million (December 2017: R61,9 million) were capitalised at an average rate of 8.35% (December 2017: 9.30%) in the current financial year relating to qualifying property,plant and equipment and intangible assets. *Refer to note 41.
- + 8. Taxation
8. Taxation December 2018 Restated
Rm 52 weeks 53 weeks* CURRENT YEAR South African normal taxation: Current taxation 404.4 465.7 Deferred taxation (100.9) 75.0 Foreign taxation: Current taxation 49.9 76.9 Deferred taxation 9.6 17.2 Withholding tax1 37.2 23.2 400.2 658.0 PRIOR YEAR (OVER)/UNDER PROVISION South African normal taxation: Current taxation 17.7 (17.3) Deferred taxation (8.4) 6.6 Foreign taxation: Current taxation (3.2) 1.4 Deferred taxation (6.9) 0.5 Withholding tax1 – (5.2) (0.8) (14.0) Taxation as reflected in the Income Statement 399.4 644.0 1The withholding tax relates to interest and dividends paid by foreign controlled entities. December 2018 Restated
% 52 weeks 53 weeks* The rate of taxation is reconciled as follows: Standard corporate taxation rate 28.0 28.0 Exempt and non-taxable income (7.7) (2.1) Disallowable expenditure 4.7 2.9 Prior year over provision (0.1) (0.6) Assessed loss not utilised 6.9 3.2 Withholding tax 0.8 1.1 Other2 (1.1) (2.6) 31.5 29.9 2 ‘Other’ includes such items as differences in foreign tax rates and capital gains tax. * Refer to note 41.
- + 9. Dividends paid to shareholders
9. Dividends paid to shareholders December 2018 December 2017 Rm 52 weeks 53 weeks Final cash dividend No 36 (2017: No 34) 587.9 488.2 Interim cash dividend No 37 (2017: No 35) 147.7 165.0 Total dividends paid 735.6 653.2 Dividend/distribution per share (cents) Final (prior year) 271.0 224.8 Interim 68.0 76.0 Total 339.0 300.8 Final dividend for the financial year ended December 2016, no 34, of 224.8 cents declared on 22 February 2017 and paid on 20 March 2017 (R488.1 million). Interim dividend for the financial year ended December 2017, no. 35 of 76.0 cents declared on 22 August 2017 and paid on 18 September 2017 (R165.0 million). Final dividend for the financial year ended December 2017, no 36, of 271.0 cents declared on 21 February 2018 and paid on 19 March 2018 (R588.5 million). Interim dividend for the financial year ended December 2018, no. 37 of 68.0 cents declared on 22 August 2018 and paid on 17 September 2018 (R147.7 million). Final dividend for the financial year ended December 2018, no 38, of 140.0 cents declared on 27 February 2019 and will be paid on 1 April 2019.
The Board has resolved to declare a distribution of fully paid Massmart ordinary shares with a par value of R0.01 each (the “Scrip Distribution”) to ordinary shareholders of Massmart recorded in the securities register of the Company at the close of business on the record date, being Friday, 29 March 2019. Shareholders will, however, be entitled to elect to receive a cash dividend (“the Cash Dividend”) of 140.0 cents per Massmart ordinary share held on the record date, being Friday, 29 March 2019, in respect of all or part of their ordinary shareholding, instead of the Scrip Distribution.For further information, refer to the “Scrip Dividend” paragraph in the December 2018 press release.
Withholding tax of 20% was applied to the dividends declared within and post the 2018 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.
- + 10. Earnings per share
10. Earnings per share December 2018 Restated
Earnings per share (cents) 52 weeks 53 weeks* Basic EPS 410.6 694.4 Diluted basic EPS 401.9 681.5 Headline EPS 416.5 688.2 Headline EPS before restructure costs (taxed) 470.0 688.2 Diluted headline EPS 407.6 675.4 Diluted headline EPS before restructure costs (taxed) 460.1 675.4 December 2018 Restated
Ordinary shares (number) 52 weeks 53 weeks* In issue 217,179,142 217,145,489 Weighted average 216,390,575 215,276,149 Diluted weighted average 221,078,690 219,352,118 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 2018 Restated
Rm 52 weeks 53 weeks* Profit for the year attributable to owners of the parent^ 888.6 1,494.9 Impairment and scrapping of assets 24.0 18.9 Taxation on impairment of assets (1.7) (5.5) Net loss on disposal of tangible and intangible assets 9.5 23.3 Taxation on disposal of tangible assets and intangible assets (3.1) (5.9) Profit on sale of non-current assets classified as held for sale (15.9) (2.3) Taxation on profit on sale of non-current assets classified as held for sale 5.6 0.2 Insurance proceeds on items of PPE (8.0) (58.8) Taxation on insurance proceeds on items of PPE 2.2 16.0 Available-for-sale reserve re-classified to the Income Statement – 1.1 Taxation on available-for-sale reserve re-classified to the Income Statement – (0.4) Headline earnings 901.2 1,481.5 Restructure costs 161.0 – Taxation on restructure cost (45.1) – Headline earnings before restructure (taxed) 1,017.1 1,481.5 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 2018 Restated
December 2018 Restated
52 weeks 53 weeks* 52 weeks 53 weeks* Rm Rm Cents/share Cents/share Profit attributable to the owners of the parent 888.6 1,494.9 410.6 694.4 Adjustment for impact of issuing ordinary shares – – (8.7) (12.9) Diluted attributable earnings 888.6 1,494.9 401.9 681.5 Headline earnings 901.2 1,481.5 416.5 688.2 Adjustment for impact of issuing ordinary shares – – (8.9) (12.8) Diluted headline earnings 901.2 1,481.5 407.6 675.4 Headline earnings before restructure costs 1,017.1 1,481.5 470.0 688.2 Adjustment for impact of issuing ordinary shares – – (9.9) (12.8) Diluted headline earnings before restructure (taxed) 1,017.1 1,481.5 460.1 675.4 Weighted average shares outstanding No. of shares December 2018 December 2017 Weighted average shares outstanding for basic and headline earnings per share 216,390,575 215,276,149 Potentially dilutive ordinary shares resulting from outstanding options and awards 4,688,114 4,075,969 Weighted average shares outstanding for diluted basic and diluted headline earnings per share 221,078,690 219,352,118 Majority of the dilutive impact arises from the Employee Share Incentive Plan introduced during 2013.For more information on these Schemes refer to note 27. ^Refer to note 41. *Refer to note 44.
- + 11. Property, plant and equipment
11. Property, plant and equipment December 2018 Cost Accumulated depreciation and impairment Net book value Rm Owned assets Freehold land and buildings 4,725.7 (325.6) 4,400.1 Leasehold improvements 1,306.1 (526.9) 779.2 Fixtures, fittings, plant and equipment 7,032.4 (3,751.7) 3,280.7 Computer hardware 1,098.3 (673.8) 424.5 Motor vehicles 458.1 (233.1) 225.0 Total 14,620.6 (5,511.1) 9,109.5 Capitalised leased assets Freehold land and buildings 499.7 (20.0) 479.7 Computer hardware 4.9 (2.2) 2.7 Motor vehicles 96.0 (40.7) 55.3 Total 600.6 (62.9) 537.7 Total property, plant and equipment 15,221.2 (5,574.0) 9,647.2 Restated December 2017 Cost Accumulated depreciation and impairment Net book value Rm Owned assets Freehold land and buildings 4,552.1 (264.7) 4,287.4 Leasehold improvements 1,155.4 (442.2) 713.2 Fixtures, fittings, plant and equipment 6,722.2 (3,418.4) 3,303.8 Computer hardware 968.1 (609.4) 358.7 Motor vehicles 407.8 (216.5) 191.3 Total 13,805.6 (4,951.2) 8,854.4 Capitalised leased assets Freehold land and buildings 453.0 (12.0) 441.0 Fixtures, fittings, plant and equipment – – – Computer hardware 1.9 (1.4) 0.5 Motor vehicles 135.8 (63.6) 72.2 Total 590.7 (77.0) 513.7 Total property, plant and equipment 14,396.3 (5,028.2) 9,368.1 Certain capitalised leased property, plant and equipment is encumbered as per note 22 and note 26. *Refer to note 41. Reconciliation of property, plant and equipment December 2018 Restated opening net book value* Additions Additions through acquisitions Disposals Depreciation Foreign exchange gain Reclassifications Impairment and scrapping Classified as held for sale Closing net book value Rm Owned assets Freehold land and buildings 4,287.4 180.9 – – (59.6) 22.8 (16.0) (6.8) (8.6) 4,400.1 Leasehold improvements 713.2 114.4 – (6.4) (98.6) 22.9 36.1 (2.4) – 779.2 Fixtures, fittings, plant and equipment 3,303.8 587.6 – (13.7) (587.7) 23.1 (22.2) (10.2) – 3,280.7 Computer hardware 358.7 211.8 – (0.5) (142.3) 3.8 (3.8) (3.2) – 424.5 Motor vehicles 191.3 80.5 – (4.2) (45.3) 1.5 2.6 (1.4) – 225.0 Total 8,854.4 1,175.2 – (24.8) (933.5) 74.1 (3.3) (24.0) (8.6) 9,109.5 Capitalised leased assets Freehold land and buildings 441.0 57.4 – – (18.7) – – – – 479.7 Computer hardware 0.5 3.0 – – (0.8) – – – – 2.7 Motor vehicles 72.2 21.9 – (13.3) (25.5) – – – – 55.3 Total 513.7 82.3 – (13.3) (45.0) – – – – 537.7 Total property, plant and equipment 9,368.1 1,257.5 – (38.1) (978.5) 74.1 (3.3) (24.0) (8.6) 9,647.2 Restated December 2017 Restated opening net book value* Additions Additions through acquisitions Disposals Depreciation Foreign exchange gain/(loss) Reclassifications Impairment and scrapping Classified as held for sale Restated closing net book value* Rm Owned assets Freehold land and buildings 3,799.1 550.7 – – (58.0) 4.9 0.1 (0.1) (9.3) 4,287.4 Leasehold improvements 657.5 162.3 0.8 (7.2) (81.6) (10.0) (2.8) (5.8) – 713.2 Fixtures, fittings, plant and equipment 3,368.1 599.5 1.1 (19.8) (608.8) (18.0) (6.7) (11.6) – 3,303.8 Computer hardware 368.4 127.2 0.1 (1.6) (130.1) (7.6) 2.9 (0.6) – 358.7 Motor vehicles 192.3 40.6 – (2.6) (36.9) (1.3) – (0.8) – 191.3 Total 8,385.4 1,480.3 2.0 (31.2) (915.4) (32.0) (6.5) (18.9) (9.3) 8,854.4 Capitalised leased assets Freehold land and buildings 165.6 281.0 – – (5.6) – – – – 441.0 Fixtures, fittings, plant and equipment 0.7 – – – – – (0.7) – – (0.0) Computer hardware 0.1 – – – (0.3) – 0.7 – – 0.5 Motor vehicles 76.0 29.1 – (4.8) (27.9) – (0.2) – – 72.2 Total 242.4 310.1 – (4.8) (33.8) – (0.2) – – 513.7 Total property, plant and equipment 8,627.8 1,790.4 2.0 (36.0) (949.2) (32.0) (6.7) (18.9) (9.3) 9,368.1 The Group has reviewed the residual values and useful lives of these tangible assets. Additions arose in the current and prior financial year as a result of new store openings and improvements to existing stores. Refer to note 29 for capital commitments. *Refer to note 41.
- + 12. Goodwill
12. Goodwill Reconciliation of goodwill Rm December 2018 December 2017 Balance at the beginning of the year 2,596.1 2,592.9 Additions through acquisitions – 4.6 Foreign exchange gain/(loss) 3.1 (1.4) 2,599.2 2,596.1 Carrying amount of significant goodwill Rm December 2018 December 2017 Masscash1 1,490.8 1,140.9 Massbuild Proprietary Limited 897.7 899.2 The Fruit Spot Proprietary Limited 173.9 173.9 Rhino Cash and Carry Group1 – 321.3 1During the current financial year Masscash continued with their strategy to integrate within each region. This resulted in a revision of the respective CGUs’ due to the cash flows no longer being significantly independent. 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. Management believes that no reasonable possible change in any of the above key assumptions would cause the carrying value of any cash generating unit to exceed its recoverable amount. 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% (December 2017: 3%). 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 13.5% (December 2017: 13.6%).
- + 13. Other intangible assets
13. Other intangible assets December 2018 Cost Accumulated amortisation and impairment Net book value Rm Owned assets Computer software 1,827.9 (786.1) 1,041.8 Right-of-use 53.7 (38.6) 15.1 Trademarks 3.5 (3.3) 0.2 1,885.1 (828.0) 1,057.1 December 2017 Cost Accumulated amortisation and impairment Net book value Rm Owned assets Computer software 1,468.9 (707.4) 761.5 Right-of-use 54.5 (33.2) 21.3 Trademarks 4.3 (4.3) – 1,527.7 (744.9) 782.8 Reconciliation of other intangible assets December 2018 Opening net book value Additions Disposals Amortisation Foreign exchange loss Reclassifications Closing net book value Rm Owned assets Computer software 761.5 430.8 (0.6) (150.7) (3.1) 3.9 1,041.8 Right-of-use 21.3 – – (5.4) – (0.8) 15.1 Trademarks – – – – – 0.2 0.2 782.8 430.8 (0.6) (156.1) (3.1) 3.3 1,057.1 December 2017 Opening net book value Additions Disposals Amortisation Foreign exchange gain/(loss) Reclassifications Closing net book value Rm Owned assets Computer software 540.1 359.5 – (144.8) – 6.7 761.5 Right-of-use 26.0 0.9 – (5.6) – – 21.3 566.1 360.4 – (150.4) – 6.7 782.8 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 relate to the SAP Hybris implementation and ERP development. ‘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 29.
- + 14. Investments
14. Investments Rm December 2018 December 2017 Financial assets designated as at fair value through profit or loss (FVTPL) Unlisted investments 100.9 132.1 – Investment in insurance cell-captive on extended warranties1 30.0 32.9 – Investment in insurance cell-captive on premium contributions2 66.3 94.0 – Investment in insurance cell-captive on credit life3 4.6 5.2 Total fair value through profit or loss 100.9 132.1 Fair value through OCI investments Listed investments4 1.1 1.1 Total fair value through OCI investments 1.1 1.1 Total investments 102.0 133.2 For more information on fair value disclosure, refer to note 37. Reconciliation of financial assets carried at fair value through profit or loss Rm December 2018 December 2017 Opening balance 132.1 140.9 Additions – 4.4 Fair value adjustments recognised in the Income Statement (31.2) (13.2) 100.9 132.1 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 sells credit life insurance through this vehicle by an arrangement with Guardrisk. 4The listed investments were classified as available-for-sale investments in 2017 and changed to fair value through OCI investments in 2018.
- + 15. Other financial assets
15. Other financial assets Rm December 2018 December 2017 Employee Share Trust Loans to the Executive Directors and other employees of Massmart Holdings Limited: 11.8 17.6 Other loans: Housing and staff loans 5.4 5.4 17.2 23.0 For more information on fair value disclosure, refer to note 37. For more information on the Group’s credit risk management, refer to note 38. No interest is levied on the housing and staff loans. The Employee Share Trust Loans to Executive Directors and other employees of the Company are non-interest bearing and are secured by the underlying ordinary shares in Massmart Holdings Limited. The loans are repayable 10 years after the grant date. Recourse is not limited to these shares and should shares sold to repay these loans be insufficient to recover the balance outstanding, the unrecovered portion remains a debt due and payable. 168,102 (December 2017: 249,733) shares with a market value of R17,314,506 (December 2017: R34,847,743) have been pledged. Details of the Employee Share Trust loans to the Executive Directors and members of the Executive Committee of the Company: Rm Hayward, GRC Other employees Total December 2018 Balance at the beginning of the year 11.9 5.7 17.6 Advanced during the year – – – Repayments (4.4) (1.4) (5.8) Balance at the end of the year 7.5 4.3 11.8 December 2017 Balance at the beginning of the year 12.7 7.1 19.8 Advanced during the year 0.3 0.2 0.5 Repayments (1.1) (1.6) (2.7) Balance at the end of the year 11.9 5.7 17.6
- + 16. Deferred taxation
16. Deferred taxation Rm December 2018 Restated
The movements during the year are analysed as follows: Net asset at the beginning of the year 605.6 662.4 Change in accounting standards (19.2) – Credit/(Debit) to the Income Statement 106.6 (99.4) (Debit)/Credit to Other comprehensive income (22.9) 17.9 (Debit)/Credit to the Statement of Changes in Equity (note 21) (3.7) 24.7 Net asset at the end of the year 666.4 605.6 Deferred taxation balances are presented in the Statement of Financial Position as follows: Deferred taxation assets 743.1 671.9 Deferred taxation liabilities (76.7) (66.3) 666.4 605.6 Opening balance Change in accounting standards^ (Charge)/credit to the Income Statement Charge to Other comprehensive income (Charge)/credit to the Statement of Changes in Equity Foreign exchange movements Closing balance Rm December 2018 Temporary differences Assessed loss unutilised 281.4 – 101.0 – – 2.8 385.2 Export partnerships (0.1) – 0.1 – – – 0.0 Debtors provisions 17.9 – 7.9 – (0.1) 0.1 25.8 Prepayments (28.1) – 4.9 – – – (23.2) Short-term provisions 121.2 1.3 12.7 – (0.1) 1.1 136.2 Property, plant and equipment (378.1) – (9.9) – – (1.1) (389.1) Finance leases (41.7) – 2.1 – 2.2 – (37.4) Long-term provisions 57.5 – (18.5) (7.1) 3.3 (0.1) 35.1 Deferred income 53.4 (20.5) 30.9 – 2.3 – 66.1 Operating lease adjustment 426.3 – (47.6) – – 5.4 384.1 Share based payment 112.4 – 34.1 – (21.6) – 124.9 S24C allowance (45.9) – 0.1 – 0.1 (0.2) (45.9) Other temporary differences1 29.4 – (11.2) (15.8) – 2.2 4.6 Total 605.6 (19.2) 106.6 (22.9) (13.9) 10.2 666.4 Opening balance Change in accounting standards^ (Charge)/credit to the Income Statement Credit to Other Comprehensive Income Credit to the Statement of Changes in Equity Foreign exchange movements Closing balance Rm Restated December 2017* Temporary differences Assessed loss unutilised 232.6 – 51.2 – – (2.4) 281.4 Export partnerships (0.1) – – – – – (0.1) Debtors provisions 18.5 – (0.6) – – – 17.9 Prepayments (16.5) – (11.6) – – – (28.1) Short-term provisions 252.2 – (130.2) – – (0.8) 121.2 Property, plant and equipment (384.0) – 1.7 – – 4.2 (378.1) Finance leases 14.7 – (56.4) – – – (41.7) Long-term provisions 54.8 – 2.8 – – (0.1) 57.5 Deferred income 73.9 – (20.0) – – (0.5) 53.4 Operating lease adjustment 354.6 – 73.6 – – (1.9) 426.3 Share based payment 81.4 – 14.3 – 16.7 – 112.4 S24C allowance (43.3) – (3.0) – – 0.4 (45.9) Other temporary differences1 23.6 – (21.2) 17.9 9.1 – 29.4 Total 662.4 – (99.4) 17.9 25.8 (1.1) 605.6 1‘Other temporary differences’ consists of deferred tax raised on lease premiums, foreign exchange movements, fair value adjustments amongst other insignificant items. Deferred tax assets of R385.2 million (December 2017: R281.4 million) have been recognised on assessed losses of R1351.1 million (December 2017: R993.4 million). The entities from which the deferred tax assets relate to are trading entities. These entities expect to make future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences and as such have recognised the deferred tax assets. Deferred tax assets have not been recognised for assessed losses to the value of R1007.1 million (December 2017: R848.1 million). Had a deferred tax asset been raised, the year end asset value would have increased by R295.5 million (December 2017: R246.9 million). The Group offsets tax assets and liabilities if, and only if, it has a legally enforceable right to set off current tax assets and current tax liabilities, and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority on the same legal entity. ^Refer to note 44. *Refer to note 41.
MASSMART GROUP ANNUAL FINANCIAL STATEMENTS 2018
Notes to the Annual Group Financial Statements 1-16
For the year ended 30 December 2018