- + 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 adoption of IFRS 16 refer to note 30. Please refer to the prior year accounting policies for the comparative numbers in this regard specifically relating to Leases. 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 29 December 2019. 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, residual values 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, at initial recognition, and subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. 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.
The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
- Financial assets measured at amortised cost
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
Financial assets measured at amortised cost are measured at amortised cost using the effective interest method, less any impairment.
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.
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.Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial.
- Financial assets measured at fair value through other comprehensive income
financial asset is measured at fair value through other comprehensive income if both of the following conditions are met:
- the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and
- the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Dividends are recognised as other income in the statement of profit or loss when the right of payment has been established and fair value changes are recognised in OCI.
- Financial assets at fair value through profit or loss (FVTPL)
A financial asset shall be measured at fair value through profit or loss unless it is measured at amortised cost or at fair value through other comprehensive income.
Financial assets at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss category.
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. The Group did not provide detailed information on how the forecast economic conditions have been incorporated in the determination of ECL because the impact is not significant given the short-term and widespread nature of the Group’s customer base. Debt instruments at amortised cost are recognised net of an allowance for ECL.
The Group considers a financial asset in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A significant internal indicator is when the counterparty fails to make contractual payments within 90 days of when they fall due. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.
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’, financial liabilities measured at amortised cost or as derivatives designated as hedging instruments.
- 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.
- Measured at amortised cost
Financial liabilities are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the effective interest amortisation process.
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.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the Consolidated Statement of Financial Position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously.
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.
Leases (IFRS 16)
Until the 2018 financial year, leases of property, plant and equipment were classified as either finance leases or operating leases, see Note 30 for details. From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group.
The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices.
Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes.
Extension and termination options are included in a number of leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group’s operations.
Group as a lessee
The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
i) Right-of-use assets
The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes:
- the amount of the initial measurement of lease liability
- any lease payments made at or before the commencement date less any lease incentives received
- any initial direct costs, and
- restoration costs
Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets. Rental contracts are typically made for fixed periods of 5 years to 10 years, with an average initial term of 7 years, but may have extension options included.
If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset.
The right-of-use assets are also subject to impairment. Refer to the accounting policy in Note 1.
ii) Lease liabilities
At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include:
- fixed payments (including in-substance fixed payments), less any lease incentives receivable
- variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date
- amounts expected to be payable by the group under residual value guarantees
- the exercise price of a purchase option if the group is reasonably certain to exercise that option, and
- payments of penalties for terminating the lease, if the lease term reflects the group exercising that option
Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
Variable lease payments that do not depend on an index or a rate are recognised as expenses in the period in which the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. The incremental borrowing rate is the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. The rate is calculated using a build-up approach that starts with a risk-free interest rate adjusted for credit risk using a regression technique to determine the yield curve.
After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
The Group’s lease liabilities are included in Interest-bearing loans and borrowings (see Note 22).
iii) Short-term leases and leases of low-value assets
The Group applies the short-term lease recognition exemption to its short-term leases of equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of IT and office equipment that are considered to be low value. Lease payments on short-term leases and leases of low value assets are recognised as expense on a straight-line basis over the lease term.
Group as a lessor
Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.
Leases (IAS 17)
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
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 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:
Determining the lease term of contracts with renewal and termination options – Group as lessee
The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.
The Group has several lease contracts that include extension and termination options. The Group applies judgement in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate.
Leases – Estimating the incremental borrowing rate
The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group ‘would have to pay’, which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. The Group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates.
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 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 for returns based on its historical experience, business forecast and the current economic conditions and assesses against these components in determining the respective constraints. Returns are generally governed by legislation in that customers have the right to return purchased inventory within a specified time period resulting in the uncertainty relating to the variable consideration being resolved within a short time frame. The inputs into the Group’s refund liability calculation is based primarily on rolling 12-month percentages of actual credit notes issued to calculate expected return percentages. Any significant changes in experience as compared to historical return pattern will impact the expected return percentages estimated by the Group. 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. 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. The inputs used in forecasting estimated taxable income, such as growth rates, margins, etc., are consistent with those used in forecasting cash-flows for other asset impairment testing and would align with the Group’s annual budgets approved by executive management. 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.
CGU non-financial assets, including goodwill impairment considerations
Determining whether non-financial assets, including goodwill are impaired requires an estimation of the value in use of the CGUs or group of CGUs to which the assets, including 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. Due to continued weak financial performance in the Massdiscounters and Masscash operating segments during the current financial year signficant indications of impairment were present and consequently impairments totalling R93.9 million and R59.5 million respectively were recognised in these segments. The value-in-use used in these assessments were determined based on management’s past experience and best estimate. The cash flows were based on the Board approved budget for the 2020 financial year, as well as forecasts until 2024. The key assumptions utilised in the forecast are set out below:
Discount rate applied – The Group has calculated a post-tax and pre-IFRS16 weighted average cost of capital (“WACC”) of 12.03%. This is utilised as a basis for performing the value-in-use calculation. In cases where the CGU is deemed to be of greater risk than the Group as a whole, a risk premium has been included in the discount rate. The discount rates utilised for the purposes of the impairment testing was 14.0%.
Growth rate applied – In determining the growth rate, consideration was given to the growth potential of the CGU. As part of this assessment, a prudent outlook was adopted that mirrors an inflationary increase in line with the consumer price index and real growth expected within the market. Based on these factors, the nominal growth rate applied for the purposes of the impairment testing ranges between 2.5% and 4.0% in general with specific CGUs within the Masscash operating segment estimating slightly higher increases.
Gross margin and expense growth – In forecasting margins and expense growth, a number of management initiatives to stabilise and improve operating performance have an influence on cash flow projections and are based on management’s best estimates .
Despite a robust budgeting and business planning process applied, a number of the economies in which the Group trades remains challenging thereby increasing the range that could apply to the key assumptions used in the valuation. Consequently, these factors have the ability to materially impact the recoverable amount assumptions modelled as part of the impairment assessment.
In addition to the above, assets totalling R76.1 million forming part of the other operating segment were impaired in the current financial year. These relate to a Group-owned store which was impaired by R25.3 million due to it being remodelled, vacant land which was impaired by R37.8 million prior to its classification as held-for-sale as well as the impairment of financial services assets amounting to R13.0 million which are not expected to generate future economic benefit to the Group.
Other than the vacant land, where the impairment assessment was performed on a fair value less cost of disposal basis, all other assessments were based on a value-in-use basis.
Detail on significant non-financial assets and goodwill can be found in note 11, note 12 and note 13.
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.
Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share award, volatility, forfeiture rate and dividend yield and making assumptions about them. For the measurement of the fair value of equity-settled transactions with employees at the grant date, the Group uses binomial and lattice models. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in note 27.
Uncertain tax positions and tax-related contingencies
Management determines the income tax charge in accordance with the applicable tax laws and rules, which are subject to interpretation. The calculation of the Group’s total tax charge may involve judgements, including those involving estimations, in respect of certain items whose tax treatment cannot be finalised until resolution has been reached with the tax authority or, as appropriate, through a formal legal process. The resolution of these items may materially impact profits, losses and /or cash flows.
Where the effect of these laws and rules is not clear management follows the clarification and guidance provided by IFRC 23 on how to apply the recognition and measurement requirements in IAS12, when there is uncertainty over the income tax treatments, or positions taken. IAS 37 is applied to the recognition and measurement of other taxes and levies, including interest and penalties which are outside the scope of IAS 12.The speed with which taxation issues are resolved is not always within the control of the Group and is often dependent on the efficiency of the legal processes. As a result, some complex tax issues may take a number of years before they are resolved. Any uncertain tax positions are reviewed at least twice a year at the time of the interim and annual audit.
- + 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:
IFRS 16 Leases (effective for annual periods beginning on 1 January 2019)
IFRS 16 introduced a single lessee accounting model and required a lessee to recognise assets and liabilities for all leases with certain expedients allowed.
The Group 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 extensively reviewed and abstracted all lease information using a systems implementation approach.
Whilst the impact on our numbers were material, business continued as usual, as leasing of stores continued as part of our business operations. Whilst there was a classification change between net operating and net financing cash flows, there was no impact on overall cash flow and the net cash position remained neutral.
The Group applied the practical expedient for the recognition of the Right-Of-Use (“ROU”) asset at transition in that the modified retrospective approach was adopted and the 2018 comparatives were not restated. The ROU asset initially equalled the lease liability at adoption date adjusted primarily for the derecognition of the lease smoothing liability and other operating lease balances.
Refer to the Group’s IFRS 16 accounting policy in note 1, note 2 for the Group’s critical accounting judgements and estimates as well as note 11, note 22 and note 30 for additional detail in this regard.
The following amendments did 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
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 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.
The Group is in the process of evaluating the impact this standard will have on its financial statements as it will change the accounting model of the insurance cell captives in which the Group has an interest.
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
- IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures
Interest Rate Benchmark Reform
- IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
Definition of Material
- The Conceptual Framework for Financial Reporting
- IFRIC 23 Uncertainty over Income Tax Treatments
- + 4. Revenue
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 4. Revenue December 2019 December 2018 Rm 52 weeks 52 weeks Sales1 93,660.0 90,941.6 Other income 179.7 231.0 – Change in fair value of financial assets carried at fair value through profit or loss 25.0 (31.1) – Dividends from unlisted investments 20.0 34.0 – Brokerage fees 38.2 34.5 – Property rentals 40.6 25.6 – Retirement of aged gift cards 3.4 17.3 – Insurance proceeds on business interruption 12.5 52.8 – Prescribed liabilities 11.9 19.4 – Other2 28.1 78.5 – Insurance proceeds on items of PP&E 3.4 8.0 93,843.1 91,180.6 1Refer to note 39 for further information on the disaggregation of revenue. Online sales are not currently a significant component of total sales and is therefore not disclosed separately. The utilised performance obligations outstanding from the prior year was R162.1 million and the remaining performance obligations at year end in this regard is R151.6 million. Included in the sales number is the commission income the Group earns as an agent through the Shield arrangement, the value of which is R312.6 million in the 2019 financial year (2018: R324.9 million). Where the Group acts as an agent in a transaction and sales are recognised on a net basis, the contractual terms of the arrangement does not meet the requirements to allow for offsetting of the financial instruments with the result that the related receivable and payable balances are disclosed on a gross basis. The Group’s performance obligation in terms of the Shield arrangement is one which has the nature of a service where the performance obligation of goods being delivered to a customer is highly interrelated and interdependent with the provision of the online platform, which allows customers to place their orders directly with the suppliers to be delivered. 2Other includes sundry income and other insignificant items. Revenue from contracts with customers for the financial year end is R93.6 billion (2018: R90.9 billion).
- + 5. Foreign exchange loss
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 5. Foreign exchange loss December 2019 December 2018 Rm 52 weeks 52 weeks Foreign exchange (loss)/gain from loans to African operations1 (10.6) 14.5 Foreign exchange (loss)/gain arising from the translation of foreign creditors2 (37.6) 3.5 Foreign exchange loss arising from foreign exchange contracts3 (5.1) (20.7) Foreign exchange loss arising from leases4 (89.7) – Total (143.0) (2.7) Foreign exchange currency exposures and rates Spot rate Spot rate Jurisdiction Currency December 2019 December 2018 United States USD 14.0252 14.4718 United Kingdom Pound Sterling 18.3486 18.3824 European Union Euro 15.6740 16.5563 Botswana Botswana Pula 1.3217 1.3731 Ghana Ghanaian New Cedi 2.4552 3.0294 Kenya Kenyan Shilling 0.1386 0.1411 Malawi Malawian Kwacha 0.0191 0.0193 Mauritius Mauritian Rupee 0.3838 0.4124 Mozambique Mozambican New Metical 0.2275 0.2280 Nigeria Nigerian Naira 0.0386 0.0432 Tanzania Tanzanian Shilling 0.0061 0.0064 Uganda Uganda Shilling 0.0038 0.0039 Zambia Zambian New Kwacha 1.0432 1.2740 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 a currency other than the respective entity’s functional currency, resulting in exchange differences. In the current year, a number of the creditor balances in our African entities are denominated in currencies other than the entity’s functional currency and consequently a major portion of our foreign exchange loss arose as a result of the strengthening of these currencies against the average basket of African currencies. 3Foreign exchange loss arising from FEC’s 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. 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. The average difference between the FEC rate and the market-to-maket rate at the end of the 2018 financial year was 0.3% compared to 5.46% in 2019. 4Foreign exchange loss arising from IFRS 16 In our operations a portion of our leases are denominated in a currency other than the respective entity’s functional currency, resulting in exchange differences. A number of the Group’s leases in its African subsidaries are denominated in USD with the result that the majority of our foreign exchange losses arose as a result of the weakening of the average basket of African currencies against the USD. For more information on the Group’s currency risk management policy refer to note 38.
- + 6. Operating profit before interest
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 6. Operating profit before interest December 2019 December 2018 Rm Notes 52 weeks 52 weeks CHARGES TO OPERATING PROFIT BEFORE INTEREST INCLUDE: Depreciation and amortisation (owned assets): 1,290.9 1,089.6 – Buildings 11 79.3 59.6 – Leasehold improvements 11 142.9 98.6 – Fixtures, fittings, plant and equipment 11 659.6 587.7 – Computer hardware 11 161.2 142.3 – Motor vehicles 11 52.3 45.3 – Computer software 13 190.3 150.7 – Legal rights 13 5.3 5.4 Depreciation and amortisation (capitalised leased assets): 11 1,776.2 45.0 – Lease assets 1,776.2 45.0 Total Depreciation and amortisation recorded outside of cost of sales 3,067.1 1,134.6 Depreciation (owned assets) recorded within cost of sales 11 5.1 – Total Depreciation and amortisation recorded 3,072.2 1,134.6 Impairment and scrapping 245.3 24.0 – Freehold land and buildings 11 63.2 6.8 – Leasehold improvements 11 25.7 2.4 – Fixtures, fittings, plant and equipment 11 77.6 10.2 – Computer hardware 11 2.4 3.2 – Motor vehicles 11 0.4 1.4 – Right-of-use assets 11 60.6 – – Computer software 13 15.4 – Share-based payment expense: 27 128.0 194.6 Short-term and low value leases, including IAS 17 operating lease charges (2018): 45.0 2,971.9 – Land and buildings 13.4 2,761.2 – Plant and equipment 30.9 101.6 – Computer hardware – 2.9 – Motor vehicles 0.7 106.2 Net (profit)/loss on disposal of tangible and intangible assets (2.5) 9.5 Consulting and professional fees1 655.2 531.1 Legal fees 29.6 25.9 Auditors’ remuneration: 36.2 32.3 – Current year fee 32.2 27.3 – Prior year fee 4.0 5.0 1Consulting and professional fees comprises payments relating to information technology outsourced support, outside warehouse services as well as group-wide consulting and professional services.
- + 7. Net finance costs
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 7. Net finance costs December 2019 December 2018 Rm 52 weeks 52 weeks Finance costs (1,860.4) (648.8) – Interest on bank overdrafts and loans1 (680.4) (570.2) – Interest on lease obligations2 (1,180.0) (78.6) Finance income 61.3 25.1 Net finance costs (1,799.1) (623.7) 1These finance charges are raised on underlying financial instruments. 2Refer to note 30 for more information regarding the additional finance charges raised as a result of the adoption of IFRS 16. Additional information on loans and leases can be found in note 22 and note 26. Borrowing costs of R48.5 million (December 2018: R53.6 million) were capitalised at an average rate of 8.15% (December 2018: 8.35%) in the current financial year relating to qualifying property,plant and equipment and intangible assets.
- + 8. Taxation
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 8. Taxation December 2019 December 2018 Rm 52 weeks 52 weeks CURRENT YEAR South African normal taxation: Current taxation 255.9 404.4 Deferred taxation (176.5) (100.9) Foreign taxation: Current taxation 47.0 49.9 Deferred taxation (10.3) 9.6 Withholding tax1 30.9 37.2 147.0 400.2 PRIOR YEAR (OVER)/UNDER PROVISION South African normal taxation: Current taxation 9.7 17.7 Deferred taxation 47.5 (8.4) Foreign taxation: Current taxation 2.0 (3.2) Deferred taxation 0.7 (6.9) Withholding tax1 (0.6) – 59.3 (0.8) Taxation as reflected in the Income Statement 206.3 399.4 1The withholding tax relates to interest and dividends paid by foreign controlled entities. December 2019 December 2018 % 52 weeks 52 weeks The rate of taxation is reconciled as follows: Standard corporate taxation rate 28.00 28.00 Exempt and non-taxable income 3.92 (7.86) Disallowable expenditure2 (19.89) 4.81 Prior year over provision (3.52) (0.06) Assessed loss not utilised3 (27.57) 6.97 Withholding tax and foreign tax credits (2.06) 0.84 Other4 2.19 (1.12) (18.93) 31.58 2The decrease in the share price from R103.00 (2018) to R50.95 (2019) resulted in a significant decrease in the deferred tax asset (DTA) raised on the equity settled share scheme at a consolidated level. For tax purposes, the deferred tax is raised at the share price as at the reporting period, based on the number of shares expected to vest. The decrease in the DTA resulted in an increase in disallowed expenses of R124 million (at rate). In addition, non-deductible interest of R19 million (at rate) and non-deductible depreciation on leasehold improvements of R6 million (at rate), increased disallowed expenses when compared to the prior period. 3The derecognition of deferred tax assets (DTA) on tax losses resulted in an increase in the effective tax rate of R316 million (at rate). This was primarily as a result of the derecognition of the Fresh Food Direct Proprietary Limited DTA as well as the DTAs previously raised for certain entities in Ghana, Zambia and Nigeria. 4‘Other’ includes such items as differences in foreign tax rates and profit on vesting of shares.
- + 9. Dividends paid to shareholders
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 9. Dividends paid to shareholders December 2019 December 2018 Rm 52 weeks 52 weeks Final dividend 302.6 587.9 Interim dividend – 147.7 Total dividends paid 302.6 735.6 Dividend/distribution per share (cents) Final (prior year) 140.0 271.0 Interim – 68.0 Total 140.0 339.0 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 (R587.9 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 paid on 1 April 2019 (R302.6 million).
On 28 February 2019 the Board declared a scrip distribution of fully-paid Massmart ordinary shares of R0.01 each (“the Scrip Distribution”) to ordinary shareholders (“Shareholders”). Shareholders not electing to receive the Cash Dividend in respect of all or part of their shareholding were entitled to receive that number of Scrip Distribution Shares determined in the ratio of 1.57392 Scrip Distribution Shares for every 100 ordinary shares held.
In terms of the Scrip Distribution, 1 959 667 new ordinary shares were issued to Shareholders who did not elect to receive the Cash Dividend in respect of all or part of their shareholding, resulting in a capitalisation of R174 324 451.0. Shareholders holding 92 661 677 ordinary shares elected to receive the gross Cash Dividend of 140 cents per ordinary share, resulting in a total gross Cash Dividend of R128 315 556.6 being paid.
- + 10. Earnings per share
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 10. Earnings per share December 2019 December 2018 Earnings per share (cents) 52 weeks 52 weeks Basic EPS (600.6) 410.6 Diluted basic EPS (594.9) 401.9 Headline EPS (527.1) 416.5 Headline EPS before reorganisation and restructure costs (taxed) (516.1) 470.0 Diluted headline EPS (522.0) 407.6 Diluted headline EPS before reorganisation and restructure costs (taxed) (511.2) 460.1 December 2019 December 2018 Ordinary shares (number) 52 weeks 52 weeks In issue 219,138,809 217,179,142 Weighted average 217,686,447 216,390,575 Diluted weighted average 219,793,137 221,078,690 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 2019 December 2018 Rm 52 weeks 52 weeks (Loss)/Profit for the year attributable to owners of the parent (1,307.5) 888.6 Write-off of tangible and intangible assets 245.3 24.0 Net (profit)/loss on disposal of tangible and intangible assets (2.5) 9.5 Profit on sale of non-current assets classified as held for sale (27.6) (15.9) Insurance proceeds on items of PPE (3.4) (8.0) Net loss arising from partial or full termination of lease 5.7 – Total tax effects of adjustments (57.4) 3.0 Headline (loss)/earnings (1,147.4) 901.2 Reorganisation and restructure costs after taxation 23.8 115.9 Headline (loss)/earnings before reorganisation and restructure costs (taxed) (1,123.6) 1,017.1 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 2019 December 2018 December 2019 December 2018 52 weeks 52 weeks 52 weeks 52 weeks Rm Rm Cents/share Cents/share Profit attributable to the owners of the parent (1,307.5) 888.6 (600.6) 410.6 Adjustment for impact of issuing ordinary shares – – 6 (8.7) Diluted attributable earnings (1,307.5) 888.6 (594.9) 401.9 Headline earnings (1,147.4) 901.2 (527.1) 416.5 Adjustment for impact of issuing ordinary shares – – 5 (8.9) Diluted headline earnings (1,147.4) 901.2 (522.0) 407.6 Headline earnings before reorganisation and restructure costs (1,123.6) 1,017.1 (516.1) 470.0 Adjustment for impact of issuing ordinary shares – – 4.9 (9.9) Diluted headline earnings before reorganisation and restructure costs (taxed) (1,123.6) 1,017.1 (511.2) 460.1 Weighted average shares outstanding No. of shares December 2019 December 2018 Weighted average shares outstanding for basic and headline earnings per share 217,686,447 216,390,575 Potentially dilutive ordinary shares resulting from outstanding options and awards 2,106,690 4,688,114 Weighted average shares outstanding for diluted basic and diluted headline earnings per share 219,793,137 221,078,690 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.
- + 11. Property, plant and equipment
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 11. Property, plant and equipment December 2019 Cost Accumulated depreciation Net book value Rm Owned assets Freehold land and buildings 4,688.8 (428.7) 4,260.1 Leasehold improvements 1,272.6 (621.4) 651.2 Fixtures, fittings, plant and equipment 6,951.4 (3,998.6) 2,952.8 Computer hardware 1,193.8 (682.0) 511.8 Motor vehicles 477.8 (267.8) 210.0 Total 14,584.4 (5,998.5) 8,585.9 Capitalised leased assets Right-of-use assets1 9,964.4 (1,681.2) 8,283.2 Total 9,964.4 (1,681.2) 8,283.1 Total property, plant and equipment 24,548.8 (7,679.7) 16,869.0 December 2018 Cost Accumulated depreciation 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 Lease assets 600.6 (62.9) 537.7 Total 600.6 (62.9) 537.7 Total property, plant and equipment 15,221.2 (5,574.0) 9,647.2 Certain property, plant and equipment is encumbered as per note 22 and note 26. Reconciliation of property, plant and equipment December 2019 Opening net book value Additions and lease modifications Disposals and lease retirements Depreciation Foreign exchange gain/(loss) Reclassifications Impairment and scrapping Classified as held for sale IFRS 16 adoption Closing net book value Rm Owned assets Freehold land and buildings 4,400.1 132.9 (1.8) (79.3) (0.4) 44.2 (63.2) (161.7) (10.7) 4,260.1 Leasehold improvements 779.2 62.3 (1.7) (142.9) (9.0) (11.0) (25.7) – – 651.2 Fixtures, fittings, plant and equipment 3,280.7 495.3 (27.8) (659.6) (30.1) (20.0) (77.6) – (8.1) 2,952.8 Computer hardware 424.5 234.4 (0.1) (161.2) (2.4) 19.0 (2.4) – – 511.8 Motor vehicles 225.0 46.1 (2.0) (57.4) (1.3) – (0.4) – – 210.0 Total 9,109.5 971.0 (33.4) (1,100.4) (43.2) 32.2 (169.3) (161.7) (18.8) 8,585.9 Capitalised leased assets Right-of-use assets1 537.7 1,207.4 (69.9) (1,776.2) (102.2) (1.9) (60.6) – 8,548.8 8,283.1 Total 537.7 1,207.4 (69.9) (1,776.2) (102.2) (1.9) (60.6) – 8,548.8 8,283.1 Total property, plant and equipment 9,647.2 2,178.4 (103.3) (2,876.6) (145.4) 30.3 (229.9) (161.7) 8,530.0 16,869.0 December 2018 Opening net book value Additions Disposals Depreciation Foreign exchange gain/(loss) Reclassifications Impairment and scrapping Classified as held for sale IFRS 16 adoption 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 Lease assets 513.7 82.3 (13.3) (45.0) – – – – – 537.7 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 1Right-of-use assets comprise predominantly of real estate leases with an insignificant portion relating to motor vehicles. 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 2 for additional details regarding the significant judgements and estimates applied in performing impairment testing. For more information on the Group’s capital commitments, refer to note 29.
- + 12. Goodwill
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 12. Goodwill Reconciliation of goodwill Rm December 2019 December 2018 Balance at the beginning of the year 2,599.2 2,596.1 Foreign exchange (loss)/gain (1.0) 3.1 2,598.2 2,599.2 Carrying amount of significant goodwill per operating segment Rm December 2019 December 2018 Masscash 1,489.8 1,490.8 Massbuild 897.7 897.7 Masswarehouse – The Fruit Spot 173.9 173.9 Other segmental goodwill, including Wumdrop 36.8 36.8 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 CGUs have been based on value in use. The key assumptions for the value in use calculations are the discount rate, growth rates, gross margins as well expense growth forecasts. 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 markets in which the Group trades. In the majority of the Group’s CGUs, to which goodwill is allocated, 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. Within the Masscash operating segment however the headroom between the CGU carrying amount and the CGU recoverable amount does vary between different CGUs. For the Free State region, the difference between the region’s carrying amount and recoverable amount per management’s value-in-use calculation is R138.4 million. If the discount rate used remains unchanged but growth rates are decreased to 5% and margin and expense growth are adjusted to the are adjusted to the average historical rates achieved average historical rates achieved, the CGUs carrying amount will equal its recoverable amount. Refer to note 2 for additional details regarding the significant judgements and estimates applied in performing impairment testing.
- + 13. Other intangible assets
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 13. Other intangible assets December 2019 Cost Accumulated amortisation Net book value Rm Owned assets Computer software 2,206.4 (946.5) 1,259.9 Trademarks – – – Legal rights 44.7 (37.2) 7.5 2,251.1 (983.7) 1,267.3 December 2018 Cost Accumulated amortisation Net book value Rm Owned assets Computer software 1,827.9 (786.1) 1,041.8 Trademarks 3.5 (3.3) 0.2 Legal rights 53.7 (38.6) 15.1 1,885.1 (828.0) 1,057.1 Reconciliation of Other intangible assets December 2019 Opening net book value Additions Disposals Impairment and scrapping Amortisation Foreign exchange loss1 Reclassifications Closing net book value Rm Owned assets Computer software 1,041.8 454.1 (2.4) (15.4) (190.3) – (27.7) 1,260.1 Trademarks 0.2 – (0.2) – – – – – Legal rights 15.1 – – – (5.3) – (2.6) 7.2 1,057.1 454.1 (2.6) (15.4) (195.6) – (30.3) 1,267.3 December 2018 Opening net book value Additions Disposals Impairment and scrapping 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 Trademarks – – – – – – 0.2 0.2 Legal rights 21.3 – – – (5.4) – (0.8) 15.1 782.8 430.8 (0.6) – (156.1) (3.1) 3.3 1,057.1 1Computer software value is less than R100,000. 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 related to the SAP Hybris implementation as well as the SAP S/4 HANA ERP development. Legal rights are in respect of payments to previous lessees in order to secure sites. Refer to note 2 for additional details regarding the significant judgements and estimates applied in performing impairment testing. For more information on the Group’s capital commitments, refer to note 29.
- + 14. Investments
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 14. Investments Rm December 2019 December 2018 Financial assets measured at fair value through profit or loss (FVTPL) Unlisted investments 126.2 100.9 – Investment in insurance cell-captive on extended warranties1 57.2 30.0 – Investment in insurance cell-captive on premium contributions2 63.3 66.3 – Investment in insurance cell-captive on credit life3 5.7 4.6 Total 126.2 100.9 Financial assets measured through other comprehensive income Listed investments 0.8 1.1 Total 0.8 1.1 Total investments 127.0 102.0 For more information on fair value disclosure, refer to note 37. Reconciliation of financial assets measured at fair value through profit or loss Rm December 2019 December 2018 Opening balance 100.9 132.1 Fair value adjustments recognised in the Income Statement 25.3 (31.2) 126.2 100.9 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.
- + 15. Other financial assets
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 15. Other financial assets Rm December 2019 December 2018 Employee Share Trust Loans to the Executive Directors and other employees of Massmart Holdings Limited: 7.5 11.8 Other loans: Housing and staff loans – 5.4 7.5 17.2 Non-current assets 7.5 – Current assets – 17.2 7.5 17.2 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. 105 448 (December 2018: 168 102) shares with a market value of R7 539 643 (December 2018: R17 314 506) have been pledged. Employee share trust loan will be repayable on 31 May 2020. Details of the Employee Share Trust loans to the Executive Directors, including previous directors and members of the Executive Committee of the Company: Rm Hayward, GRC Other employees Total December 2019 Balance at the beginning of the year 7.5 4.3 11.8 Repayments – (4.3) (4.3) Balance at the end of the year 7.5 – 7.5 December 2018 Balance at the beginning of the year 11.9 5.7 17.6 Repayments (4.4) (1.4) (5.8) Balance at the end of the year 7.5 4.3 11.8
- + 16. Deferred taxation
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS 16. Deferred taxation Rm December 2019 December 2018 The movements during the year are analysed as follows: Net asset at the beginning of the year 666.4 605.6 Change in accounting standards – (19.2) Credit to the Income Statement 138.6 106.6 Debit to Other comprehensive income 12.1 (22.9) Debit to the Statement of Changes in Equity (note 21) (11.1) (3.7) Net asset at the end of the year 806.0 666.4 Deferred taxation balances are presented in the Statement of Financial Position as follows: Deferred taxation assets 885.7 743.1 Deferred taxation liabilities (79.7) (76.7) 806.0 666.4 Opening balance Change in accounting standards^ Credit/(Charge) 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 2019 Temporary differences Assessed loss unutilised 385.2 – 3.2 – – (1.9) 386.5 Export partnerships – – – – – – – Debtors provisions 25.8 – 17.4 – – (0.1) 43.1 Prepayments (23.2) – (0.2) – – – (23.4) Short-term provisions 136.2 – 79.0 – – (0.9) 214.3 Property, plant and equipment (389.1) – (34.3) – – 4.0 (419.4) Leases (37.4) 395.5 165.0 – – (5.1) 518.0 Long-term provisions 35.1 – (8.5) (3.1) – – 23.5 Deferred income 66.1 (7.6) (23.9) – – – 34.6 Operating lease adjustment 384.1 (387.9) 3.5 – – 0.3 0.0 Share based payment 124.9 – (70.6) – (1.5) – 52.8 S24C allowance (45.9) – 31.8 – – – (14.1) Other temporary differences1 4.6 – (23.8) 15.2 – (5.9) (9.9) Total 666.4 – 138.6 12.1 (1.5) (9.6) 806.0 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 December 2018 Temporary differences Assessed loss unutilised 281.4 – 101.0 – – 2.8 385.2 Export partnerships (0.1) – 0.1 – – – – 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 1‘Other temporary differences’ consists of deferred tax raised on lease premiums, foreign exchange movements, fair value adjustments amongst other insignificant items. ^Refer to note 30 for the adoption of the new standard. Deferred tax assets of R386.5 million (December 2018: R385.2 million) have been recognised on assessed losses of R1 382.6 million (December 2018: R1 351.1 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 R2 211.5 million (December 2018: R1 007.1 million). Had a deferred tax asset been raised, the year end asset value would have increased by R645.9 million (December 2018: R295.5 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.
MASSMART GROUP ANNUAL FINANCIAL STATEMENTS 2019
Notes to the Annual Group Financial Statements 1-16
For the year ended 29 December 2019