These annual financial statements are prepared on a historical cost basis, adjusted for the revaluation of land and buildings and the restatement of certain financial instruments to fair value. The financial statements incorporate the following accounting policies which conform with South African Statements of Generally Accepted Accounting Practice. These policies are consistent with those applied in the previous year, except for the change in accounting policy in respect of the adoption of AC140 (Business Combinations) set out in note 2.
 

The consolidated annual financial statements incorporate the financial statements of the Company and its subsidiaries. Subsidiaries are entities in which the Group has an interest of more than one half of the voting rights or otherwise has the power to govern the financial or operating policies. The results of the subsidiaries are included from the effective dates of acquisition to the effective date of disposal. The accounting policies and year-ends of all subsidiaries are consistent throughout the Group. Intergroup transactions and balances are eliminated on consolidation.

In anticipation of the listing, Lewis Group Limited acquired the entire share capital of Lewis Stores (Pty) Ltd from the GUS PLC Group and, in return, issued its share capital to the GUS PLC Group. The effect of the transaction was to interpose Lewis Group Limited as the holding company of Lewis Stores (Pty) Ltd. The restructuring affected the share capital of Lewis Group Limited, but it had no impact on the equity of the consolidated Lewis Group as in substance, no transaction occurred. The shareholder equity and reserves, and the results disclosed for the Lewis Group in the current and prior years are, therefore, of Lewis Stores (Pty) Ltd and its subsidiaries.

Investments in subsidiaries are carried at cost less any impairments. Employee share trusts are consolidated.

Shares in Lewis Group Limited held by the share trusts are classified as treasury shares.
 

Goodwill

Goodwill, being the excess of the purchase consideration over the attributable fair value of the identifiable assets and liabilities at the date of acquisition, is initially carried at cost. Goodwill is subject to an annual impairment test and written down to the recoverable amount, where impairment has occurred.

Any excess of the interest in the fair value of the identifiable assets and liabilities over the purchase consideration at the date of acquisition is recognised immediately in the income statement.
 

Foreign entities

Foreign subsidiaries are classified as foreign entities. The assets and liabilities of foreign subsidiaries (excluding loans which are part of the net investment) are translated into South African Rands at the rate of exchange ruling at the balance sheet date. Income, expenditure and cash flow items are translated at the average rate of exchange for the year. Differences arising on translation are reflected in a foreign currency translation reserve. On disposal of a foreign subsidiary, such translation differences are recognised in the income statement as a gain or loss of the sale.
 

Financial instruments

Financial instruments are initially measured at cost, including transaction costs. The subsequent measurement of the various financial instruments is as follows:
 

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and deposits reduced by amounts in overdraft. These are carried at amortised cost.
 

Derivative instruments

Derivative instruments (forward exchange contracts) are utilised to hedge its exposure to foreign currency fluctuations. Despite the derivative instruments providing effective economic hedges, changes in the fair value of these derivative instruments are recognised immediately in the income statement.
 

Investments

Investments are classified into three classes, based on the purpose for which the investment was acquired. The classification is determined at the time of the investment and re-evaluated thereafter on a regular basis.

The investments are classified as follows:
 

Purchases and sales of investments are recognised on the trade date, being the date that the Group commits to the transaction. The cost of the purchase, for initial recognition purposes, includes transaction costs. Thereafter both the trading and available-for-sale assets are carried at fair value, which is calculated by reference to quoted bid prices at the close of business on the balance sheet date or, where appropriate, discounted cash flow models. Realised and unrealised gains and losses arising from changes in the fair value of trading investments are included in the income statement in the period in which they arise, and unrealised gains and losses arising from changes in fair value of available-for-sale investments are recognised in equity. When investments classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses from investments.
 

Trade and other receivables

Trade receivables are recognised at amortised cost using the effective interest rate, less provision for impairment. A provision for impairment of trade receivables is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. Changes in the provision are recognised in the income statement.
 

Financial liabilities

Financial liabilities are recognised at amortised cost, being original debt value less principal payments and amortisations, except for derivatives which are accounted for in accordance with 1.4.2.
 

Set-off

Where there is a legally enforceable right of set-off between a financial asset and liability, and settlement is intended to take place on a net basis or simultaneously, such financial asset and financial liability are offset.
 

Property, plant and equipment

Property, plant and equipment, with the exception of land and buildings, is carried at cost less accumulated depreciation.

Freehold land and buildings are initially measured at cost and subsequently at market value less subsequent accumulated depreciation and impairments in value.

Market value is based on valuations performed by independent external valuers every five years. Increases in carrying value are taken directly to a revaluation reserve. On disposal of a previously revalued property, any amount relating to that asset remaining in the revaluation reserve, is transferred directly to retained earnings. Decreases in market value that offset previous increases in the same asset are charged against the revaluation reserve. All other decreases are charged to the income statement. Revaluation reserves are not adjusted for the additional depreciation incurred on the revalued amount.

Assets are depreciated to their residual value, on a straight-line basis, over their estimated useful lives. The estimated useful lives of the assets in years are:

Leased assets

Leases of property, plant and equipment, where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the inception of the lease at the lesser of the fair value of the leased assets or the present value of the minimum lease payments. Lease payments are allocated, using the effective interest rate method, between the lease finance cost, which is included in financing costs, and the capital repayment, which reduces the liability to the lessor. Capitalised leased assets are depreciated to their estimated residual value over their estimated useful lives.

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense against operating profit systematically over the lease term.
 

Inventories

Inventory, comprising merchandise held for resale, is valued at the lower of cost or net realisable value. Cost is determined using the weighted average basis. Net realisable value is the estimated selling price in the ordinary course of business, less variable selling expenses. Provision is made for slow-moving, redundant and obsolete inventory.
 

Impairment

The carrying value of assets is reviewed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Where the carrying value exceeds the estimated recoverable amount, such assets are written down to their recoverable amount.
 

Deferred taxation

Deferred taxation is provided, using the liability method, on all temporary differences between the taxation base of an asset or liability and its carrying value. The deferred taxation is calculated based on currently enacted rates of taxation. A deferred tax asset is raised only if, and to the extent that, it is probable that sufficient taxable profit will arise in the foreseeable future against which the asset can be realised. Provision for taxation which could arise on remittance of retained earnings is only made where there is a current intention to remit such earnings.
 

Provisions

A provision is recognised when the Group has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.
 

Outstanding claims

Provisions are made for the estimated final costs of all claims notified but not settled at the accounting date and claims arising from insured contingencies that occurred before the close of the accounting period, but which had not been reported by that date (IBNR reserve).
 

Contingency reserve

A contingency reserve is maintained in terms of the Insurance Act, 1998. Transfers to this reserve are at 10% of premiums written less reinsurance and are treated as an appropriation of distributable reserves.
 

Provision for unearned premiums

The provision for unearned premiums represents that part of the current year's premiums that relates to risk periods that extend to the subsequent years.
 

Segmental information

The principal segments of the Group have been identified on a primary basis by the principal revenue producing activities of the Group and on a secondary basis by significant geographical region. The basis is representative of the internal structure for management purposes. The source and nature of business risks are segmented on the same basis. The accounting policies are consistently applied in determining the segmental information.
 

Current assets and liabilities

Current assets and liabilities have maturity terms of less than 12 months, except for instalment sale and loan receivables. Instalment sale and loan receivables, which are included in trade and other receivables, have maturity terms of between 6 - 24 months but are classified as current as they form part of the normal operating cycle.
 

Retirement plans

The Group operates a number of defined benefit and defined contribution plans, the assets of which are held in separate trustee-administered funds. These plans are funded by payments from employees and Group companies, taking into account the recommendations of independent, qualified actuaries. Pension costs are assessed annually by a qualified actuary, in terms of AC116, using the project unit credit method.

The liability in respect of defined benefit pension plans is the present value of the defined benefit obligations at the balance sheet date minus the fair value of plan assets, together with adjustments for actuarial gains/losses and any past service cost. The present value of the defined benefit obligation is determined by the estimated future cash outflows using interest rates of government securities which have terms to maturity approximating the terms of the related liability.

To the extent that actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions and amendments to pension plans exceed the greater of 10% of the fund's obligation or plan assets at the end of the previous reporting period, the excess is charged or credited to income over the average remaining service lives of employees. Actuarial surpluses are not accounted unless the Group has a legal right to such surpluses.

The Group's contributions to the defined contribution pension plans are charged to the income statement in the year to which they relate and have been included in employment costs.
 

Post-retirement healthcare costs

The Group has an obligation to provide post-retirement medical aid benefits by subsidising medical aid contributions of certain retired employees and ex-gratia pensioners, who joined the Group prior to 1 August 1997. The post-retirement healthcare costs are assessed annually by a qualified independent actuary using the projected unit credit method. The cost of providing these subsidies and any actuarial gains and losses are recognised in the income statement immediately. The post-retirement healthcare benefit is measured as the present value of the estimated future cash outflows using an appropriate discount rate.
 

Provision for leave pay

Employee entitlements to annual leave are recognised as they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services provided by employees up to the balance sheet date.
 

Borrowings

Borrowings are recognised initially at amortised cost. Borrowings are classified as current liabilities unless the Group has an unconditional liability for at least 12 months after the balance sheet date.
 

Trading cycle

The Group's trading cycle, consistent with prior financial periods, ends on the 5th day after the month being reported on, unless such day falls on a Sunday, in which case it ends on the 4th day.
 

Revenue recognition

Revenue comprises merchandise sales net of discounts, earned finance charges, earned TV and appliance service contracts, cartage and gross insurance premiums earned. Value-added tax is excluded.

Revenue from the sale of merchandise is recognised on the date of delivery. Insurance premiums are recognised on a time proportionate basis over the period of the contract, after an appropriate allowance is made for commission and reinsurance cost. Finance charges are recognised, on a sum-of-digits basis which closely approximates the effective yield basis, as instalments become due. Revenue from maintenance contracts is recognised on a straight-line basis, over a 24-month period, commencing after the manufacturer's guarantee has expired. Revenue from the provision of other services is recognised when the services are rendered.

Interest on investments is recognised on a time proportion basis taking to account the effective yield on the assets. Dividends are recognised when the right to receive payment is established.
 

Cost of sales

Cost of sales includes the costs of merchandise and distribution costs incurred in bringing inventories to their final retail location, as well as re-insurance premiums.
 

Share-based payments

The Group operates a number of share incentive trusts. The shares have been provided to these trusts at no consideration by the controlling shareholder.

No expense for share-based payments has been recognised in the income statement.
 

CHANGE IN ACCOUNTING POLICY

The adoption of AC140 (Business Combinations) results in the following change to the accounting policy on goodwill:
 

 
Computer equipment, with a carrying value of R2.2 million (2004 - R6.7 million) acts as security for finance lease liabilities - refer capitalised finance lease liabilities note 12.

The market value of freehold land and buildings was established by independent external professional valuers at 1 October 2001 on an open market basis. If land and buildings had not been revalued, the carrying value would be R10.2 million (2004 - R9.2 million). Depreciation would be R0.9 million (2004 - R0.9 million) less. A register of the Group's land and buildings is available for inspection at the Group's registered office.

Included in additions in 2004 is property, plant and equipment to the value of R1.4 million acquired as part of the acquisition of Lifestyle Living (Pty) Ltd.
 

Effective 7 October 2003 Lewis Group acquired 100% of the equity in Lifestyle Living (Pty) Ltd. The fair value of the assets and liabilities at the date Lifestyle became a subsidiary are as follows:

Included in "Cash on hand and deposits" are bank balances held in foreign currency (Pula) amounting to R47.7 million (2004 - R28.3 million).