annual financial statements

notes to the annual financial statements
for the year ended 31 March 2006

1 Basis of preparation

The consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments which have been recognised at their fair value, and in accordance with International Financial Reporting Standards (“IFRS”) and the requirements of the Companies Act. These are the group’s first financial statements prepared in compliance with IFRS. In prior years, the financial statements were prepared in accordance with South African Statements of Generally Accepted Accounting Practice (SA GAAP).

Being a first time adopter of IFRS, the date of transition is 1 April 2004. The opening balance sheet on 1 April 2004 and the comparative information for 2005 have been restated. The effect of the adoption of IFRS has been fully detailed in annexure A entitled “Transition to International Financial Reporting Standards”.

The relevant mandatory IFRS statements have been adopted for the current financial year. The following standards and interpretations, which have been issued but which are not yet effective, have not been applied in these financial statements:

IAS 19 amendment: Employee Benefits
IAS 21 amendment: Net Investment in Foreign Operations
IAS 39 amendment: Fair Value Option
IFRS 7 and IAS 1 (amendment): Financial Instruments – Capital Disclosures
IFRIC 8: Scope of IFRS 2

Management have not performed an assessment of the potential impact, if any, that the implementation of these standards and interpretations will have on the consolidated financial statements.

The preparation of the financial statements necessitates the use of estimates, assumptions and judgements. Estimates are based on management’s knowledge and judgement of the current circumstances at the balance sheet date. For further information on critical estimates and judgements, refer to note 2.

1.1 Basis of consolidation

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 date 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.

Investments in subsidiaries are carried at cost less any impairment. Employee share trusts are consolidated. Shares in Lewis Group Limited held by subsidiaries and the share trust are classified as treasury shares.

1.2 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 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.

1.3 Foreign currency translations

1.3.1 Functional and presentation currency

The financial statements of the subsidiaries are measured in the currency of the primary economic environment of the subsidiary (“the functional currency”). The group and company financial statements are presented in South African Rand, the group and company’s functional and presentation currency.

1.3.2 Foreign currency transactions and balances

Transactions in foreign currency are converted at the exchange rate ruling at the transaction date. Monetary assets and liabilities are translated at the rate of exchange ruling at the balance sheet date. Resultant exchange profits and losses are recognised in the income statement.

1.3.3 Foreign entities

The assets and liabilities of foreign subsidiaries (excluding loans which are part of the net investment) are translated at the closing rate, while income, expenditure and cash flow items are translated using the average exchange rate. 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.

1.4 Financial instruments

1.4.1 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.

1.4.2 Derivative instruments

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

1.4.3 Financial assets

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:

(i)

Financial assets designated as fair value through profit and loss. A financial asset is classified as such where the asset is acquired for the purpose of selling in the short term or the asset is specifically designated by management. These assets are classified as current assets where expected to be realised within twelve months of balance sheet date.

(ii)

Financial assets acquired with the intention of being held indefinitely are classified as available-for-sale and included in non-current assets. Where management has the express intention of holding the financial asset for less than twelve months from the balance sheet date, these are classified as current assets.

(iii)

Held-to-maturity investments are financial assets with fixed or determinable payments and fixed maturities acquired with the intention to hold to maturity. Held-to-maturity investments are carried at amortised cost using the effective interest rate method.

Purchases and sales of financial assets are recognised on the trade date, being the date that the group commits to the transaction. The financial assets are initially recognised at their fair value with transaction costs being expensed in the income statement in respect of assets classified as fair value through profit and loss and for other categories, added to their carrying value. Both the assets designated as fair value through profit and loss and available-for-sale assets are carried at fair value and valued by reference to quoted bid prices at the close of business on the balance sheet date or, where appropriate, by discounted cash flow.

Realised and unrealised gains and losses arising from a change in the fair value of financial assets classified as fair value through profit and loss are included in the income statement in the period in which they arise.

Unrealised gains and losses arising from a change in fair value of available-for-sale investments are recognised in equity. When investments classified as available-for-sale are sold, the accumulated fair value adjustment is included in the income statement as gains and losses on investment.

At each balance sheet date, an assessment is made as to whether there is objective evidence to impair the financial assets. If any such evidence exists for available-for-sale financial assets, the cumulative loss less any impairment previously recognised on the asset is removed from equity and recognised in the income statement.

1.4.4 Trade and other receivables

Trade receivables are recognised at amortised cost using the effective interest rate, less a provision for impairment. The provision for impairment 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.

1.4.5 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.

1.4.6 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.

1.5 Property, plant and equipment

Property, plant and equipment is carried at cost less accumulated depreciation. The asset’s residual values and useful lives are reviewed and adjusted, if appropriate, at each balance sheet date.

Subsequent expenditure is capitalised when it is probable that future economic benefits will arise. All other expenditure is recognised through profit and loss.

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:

Buildings	50 years
Leased equipment	3 years
Furniture and equipment	3 to 10 years
Vehicles	4 to 5 years
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1.6 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 the shorter of the lease period or 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 on a straight-line basis over the lease term.

1.7 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 of trade and settlement discounts. 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.

1.8 Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortisation, but tested annually for impairment. Assets that are subject to amortisation and depreciation are reviewed for impairment whenever circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount may not be recoverable.

1.9 Deferred taxation

Deferred taxation, using the liability method, is provided on all temporary differences between the taxation base of an asset or liability and its carrying value. Deferred taxation is calculated at currently enacted rates of taxation. A deferred tax asset is raised to the extent that it is probable that sufficient taxable profit will arise in the foreseeable future against which the asset can be realised.

1.10 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.

1.11 Insurance business

1.11.1 Outstanding claims

Provision is made for the estimated final cost 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.

1.11.2 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 treated as an appropriation of retained earnings.

1.11.3 Provision for unearned premiums

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

1.12 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 source and nature of business risks are segmented on the same basis. Assets, liabilities, revenues and expenses that are not directly attributable to a particular segment are allocated between segments where there is a reasonable basis for doing so. The accounting policies are consistently applied in determining the segmental information.

1.13 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 to 24 months but are classified as current as they form part of the normal operating cycle.

1.14 Share capital

Ordinary shares are classified as equity. Where any group company purchases the company’s equity share capital (treasury shares), the consideration paid, including the costs attributable to the acquisition, is deducted from the group’s equity until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of transaction costs, is included in the group’s equity.

1.15 Employee benefits

1.15.1 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 IAS 19, 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.

1.15.2 Post-retirement health care 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.

1.15.3 Share-based payments

The group operates a number of equity-settled share incentive schemes. The fair value of the employee services received in exchange for the grant of share awards and options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of share awards and options granted, excluding the impact of non-market vesting conditions. Non-market vesting conditions are included in the assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the group revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, with a corresponding adjustment to equity. Any accelerated vesting of the share awards and options requires immediate recognition of the remaining expense.

1.15.4 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.

1.16 Borrowings

Borrowings are recognised initially at fair value and subsequently 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.

1.17 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.

1.18 Revenue recognition

Revenue comprises merchandise sales net of discounts, earned finance charges, earned TV and appliance service contracts, cartage and insurance premiums earned, net of reinsurance premiums paid. 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 over a 24-month period to ensure a reasonable profit margin. 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.

2 Critical accounting estimates and judgements

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the preparation of the financial statements, the following key estimates were made in determining the assets and liabilities of the group:

2.1 Impairment of receivables

A discounted cash flow model using the contractual interest rate on the expected future collections from customers is applied. The cash flows are calculated using the payment ratings of customers at the balance sheet date. Payment ratings assess the customer’s actual payment pattern as compared to the contractual payments. Customer payment ratings are affected by the overall economic and credit environment such as the levels of employment and interest rates and, consequently, the impairment provision will be dependent on the changing financial circumstances of our customers.

2.2 Bad debts

Customer accounts are written off, once it is assessed that the customer is no longer in a position to service the account.

2.3 Share-based payment

As a consequence of the former ultimate holding company, GUS plc disposing of its controlling interest in Lewis and the resulting vesting of share awards and options in terms of the rules of the scheme, a share-based payment charge of R58.4 million was incurred. The share-based payment was valued in terms of an option pricing model. Details of the option pricing model and the assumptions used are detailed in note 18.2.

2.4 Normal and deferred taxation

Deferred tax assets are recognised on the basis described in note 1.9. The tax and deferred tax liabilities and assets are calculated using considered interpretations of the tax laws of the jurisdictions in which the group operates.

2.5 Retirement benefits

The underlying actuarial assumptions are set out in note 13.

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		Land and	Leased	Vehicles &
		buildings	equipment	fixtures	Total
		Rm	Rm	Rm	Rm
3	Property, plant and equipment
	Group
	As at 31 March 2006
	Opening net carrying value	83.7	2.2	73.6	159.5
	Additions	0.5	–	39.3	39.8
	Disposals	–	–	(1.1)	(1.1)
	Depreciation	(0.7)	(1.8)	(32.5)	(35.0)
	Closing net carrying value	83.5	0.4	79.3	163.2
	Cost	86.6	67.6	251.2	405.4
	Accumulated depreciation	(3.1)	(67.2)	(171.9)	(242.2)

	As at 31 March 2005
	Opening net carrying value	84.7	7.3	71.0	163.0
	Additions	1.2	–	36.2	37.4
	Disposals	(1.5)	(0.5)	(2.0)	(4.0)
	Depreciation	(0.7)	(4.6)	(31.6)	(36.9)
	Closing net carrying value	83.7	2.2	73.6	159.5
	Cost	86.1	67.6	226.5	380.2
	Accumulated depreciation	(2.4)	(65.4)	(152.9)	(220.7)

	Computer equipment, with a carrying value of R0.4 million (2005: R2.2 million) acts as security for finance lease liabilities – refer capitalised finance lease liabilities note 11. A register of the group’s land and buildings is available for inspection at the company’s registered office.

Group

Company

2006

2005

2006

2005

4 Investments – insurance business

Carrying value and market value

Listed investments

Listed shares – available-for-sale

159.4

115.1

Investment policy – available-for-sale

64.0

56.5

Gilts – available-for-sale

254.6

229.0

Unlisted Investments

Money market – held-to-maturity (at director’s valuation)

111.9

105.2

589.9

505.8

Analysed as follows

Long term

478.0

400.6

Short term

111.9

105.2

589.9

505.8

Movement for the year

Beginning of the year

505.8

442.9

Net additions to investments

18.6

26.5

Movement in fair value transferred to equity

65.5

36.4

End of the year

589.9

505.8

A register of listed investments is available for inspection at the company’s registered office. Details of the nature of the investment policy appears in note 28. Regular purchases and sales of financial assets are accounted for on the trade date.

5 Interest in subsidiaries

Shares at cost

–

2 800.0

2 800.0

Indebtedness

–

1.4

2.1

–

2 801.4

2 802.1

Details of investments in and indebtedness by subsidiaries is given in Annexure B.

6 Inventories

Cost of merchandise

233.2

171.7

Less: provision for obsolescence

(20.6)

(15.9)

212.6

155.8

7 Trade and other receivables

Instalment sale and loan receivables

2 921.4

2 677.1

Provision for unearned finance charges and unearned maintenance

income

(508.0)

(414.4)

Provision for impairment

(368.0)

(385.4)

Provision for unearned insurance premiums

(184.8)

(154.4)

Unearned insurance premiums

(300.9)

(254.9)

Less: re-insurer’s share of unearned premiums

116.1

100.5

Net instalment sale and loan receivables

1 860.6

1 722.9

Other receivables

35.9

27.7

1 896.5

1 750.6

Amounts due from instalment sale and loan receivables after 1 year are reflected as current, as they form part of the normal operating cycle. The credit terms of instalment sale and loan receivables range from 6 to 24 months.

8 Share capital and premium

8.1 Authorised

150 000 000 ordinary shares of 1c each

1.0

1.0

1.5

1.5

8.2 Issued

100 000 000 ordinary shares of 1c each

0.9

0.9

1.0

1.0

Share premium

676.0

676.0

2 799.0

2 799.0

676.9

676.9

2 800.0

2 800.0

Treasury shares:

Lewis Stores (Pty) Ltd

(151.9)

–

Lewis Employee Share Incentive Scheme Trust

(0.1)

–

Total share capital and premium

524.9

676.9

2 800.0

2 800.0

Lewis Stores (Pty) Ltd acquired shares on the open market in terms of the authority granted by shareholders at the annual general meeting held on 5 August 2005. The average price paid for these shares was R44.86, with the lowest price being R41.75 and the highest R55.80.

000’s

000’s

000’s

000’s

8.3 Number of ordinary shares in issue

Number of shares issued

100 000

100 000

Treasury shares held by:

Lewis Stores (Pty) Ltd

(3 365)

–

Lewis Employee Share Incentive Scheme Trust

(1 566)

–

Number of shares in issue

95 069

100 000

9 Other reserves

Comprising:

Fair value reserve

89.5

20.6

Foreign currency translation reserve

(26.6)

(2.9)

Share-based payment reserve

0.3

10.8

Other

0.8

0.8

64.0

29.3

Statutory insurance contingency reserve

28.0

23.0

92.0

52.3

Detailed movements in the other reserves are disclosed in the statement of changes in equity.

10 Retained Earnings

Comprising:

Company

0.1

0.2

0.1

0.2

Consolidated subsidiaries

1 688.4

1 330.2

–

1 688.5

1 330.4

0.1

0.2

Distribution by certain foreign subsidiaries will give rise to withholding taxes of R20.4 million (2005: R34.8 million). No provision is raised until dividends are declared.

11 Interest-bearing borrowings

Capitalised finance leases secured by computer equipment with a net book value of R0.4 million (2005: R2.2 million), bearing interest at rates linked to prime, repayable annually over periods of 2 years

1.8

8.9

Current portion of capitalised finance lease

(0.8)

(7.2)

1.0

1.7

Total interest-bearing borrowings

1.8

8.9

Long-term portion of interest-bearing borrowings

1.0

1.7

Current portion of interest-bearing borrowings

0.8

7.2

12 Deferred taxation

Balance at the beginning of the year

(36.7)

25.2

Movement for the year attributable to:

Income statement credit

(41.0)

(68.5)

Deferred tax on fair value adjustment in equity

8.9

6.6

Balance at the end of the year

(68.8)

(36.7)

This balance comprises:

Capital allowances

35.9

27.7

Debtors allowances

(68.5)

(30.0)

Income and expense recognition

1.7

0.2

Other provisions

(37.9)

(34.6)

Balance at the end of the year

(68.8)

(36.7)

Disclosed as:

Deferred tax asset

(89.7)

(48.7)

Deferred tax liability

20.9

12.0

(68.8)

(36.7)

13 Retirement benefits

Amounts recognised in the balance sheet

Defined benefit retirement plan liability

34.6

37.7

Post-retirement healthcare benefits

41.2

34.7

75.8

72.4

Retirement plans

The group operates a number of retirement funds, all of which are held separate from the group’s assets. There are three defined contribution funds; namely the Lewis Stores Provident Fund; the Lewis Stores Namibia Provident Fund for Namibian employees; and the SACCAWU Provident Fund for employees belonging to SACCAWU Trade Union. In addition, there are two defined benefit funds; namely the Lewis Stores Group Pension Fund which was closed to new members on 1 July 1997; and the Lewis Stores Retirement Fund for executive management. Both defined benefit plans are registered under the Pension Funds Act No. 24 of 1956.

The number of employees on these plans are as follows:

Fund

No of staff

Lewis Stores Group Pension Fund

361

Lewis Stores Retirement Pension Fund

SACCAWU Provident Fund

595

Lewis Stores Provident Fund

2 764

Lewis Stores Namibia Provident Fund

102

Defined benefit plans

The defined benefit funds are final salary defined benefit plans. These schemes are valued by an independent actuary on an annual basis in terms of IAS19 using the projected unit credit method. The latest valuation was carried out as at 1 January 2006.

Amounts recognised in the balance sheet

Present value of obligations

269.9

242.5

Fair value of plan assets

(252.2)

(213.6)

17.7

28.9

Unrecognised actuarial gains

16.9

8.8

Defined benefit retirement plan liability

34.6

37.7

Amounts recognised in the income statement

Current service cost

8.9

9.2

Interest cost

21.4

20.1

Expected return on plan assets

(20.0)

(17.5)

Net actuarial losses recognised in the year

2.3

–

Total included in staff costs

12.6

11.8

Movement in retirement benefit liability

Present value at the beginning of the year

37.7

44.2

Income statement charge

12.6

11.8

Contributions paid during the year

(15.7)

(18.3)

Present value at the end of the year

34.6

37.7

Principal actuarial assumptions used were as follows:

Discount rate

7.5%

9.0%

Expected return on plan assets

9.0%

9.5%

Inflation rate

4.5%

6.0%

Future salary increases

5.5%

7.0%

Future pension increases

4.5%

6.0%

Actual return on plan assets

14.8%

10.3%

Defined contribution plans

For defined contribution plans, the group pays contributions to the funds on a contractual basis. Once the contributions have been paid, the group has no further payment obligations.

Defined contribution plan costs

14.7

13.5

Post-retirement healthcare benefits

The group provides a subsidy of medical aid contributions to retired employees. Only those employees employed prior to 1 August 1997 qualify for this benefit. The liability was valued as at 31 March 2006 by a qualified actuary in accordance with the requirements of IAS19. The group has a commitment to meet these unfunded benefits.

Amounts recognised in the income statement

Current service cost

0.6

0.7

Interest cost

2.6

2.4

Actuarial loss

5.4

2.5

Income statement charge

8.6

5.6

Defined benefit plans

Movement in post-retirement healthcare liability

Present value of liability at the beginning of the year

34.7

31.0

Charged to income statement

8.6

5.6

Employer benefit payments

(2.1)

(1.9)

Post-retirement healthcare benefits liability

41.2

34.7

Principal actuarial assumptions used were as follows:

Health care inflation rate

4.5%

4.0%

CPI inflation

4.5%

4.0%

Discount rate

7.5%

8.5%

Average retirement age (years)

14 Trade and other payables

Trade payables

110.2

74.9

–

Accruals and other payables

83.2

72.8

1.3

1.9

Due to reinsurers

66.9

57.9

–

Insurance provisions

23.2

19.6

–

283.5

225.2

1.3

1.9

15 Overdrafts and short-term interest-bearing borrowings

These borrowings are unsecured. The average closing interest rate on these borrowings was 7.2%

132.8

172.0

132.8

172.0

16 Insurance premiums earned

Gross insurance income

566.1

501.0

Reinsurance premiums

(165.7)

(143.4)

400.4

357.6

17 Cost of merchandise sales

Purchases

1 077.4

889.3

Movement in inventory

(56.8)

(4.3)

Cost of merchandise sales

1 020.6

885.0

Merchandise gross profit

547.2

466.9

18 Directors and employees

18.1 Employment costs

Salaries, wages, commissions and bonuses

398.3

371.8

Retirement benefit costs

35.9

30.9

Other employment costs

5.7

3.3

439.9

406.0

18.2 Share-based payments

As the fair value of the services received cannot be measured reliably, the services have been valued by reference to the fair value of shares and options granted. The fair value of such shares and options are measured at the grant date using the Black-Scholes model.

On 26 May 2005, the former ultimate holding company GUS plc indirectly sold its controlling interest in the Lewis Group. This sale resulted in a change in control and in terms of the scheme rules, the awards and options vested immediately. The share price at the date of vesting was R34.

In terms of IFRS 2, notwithstanding that the awards and options were granted at no cost to Lewis by GUS group, share-based payments are required to be expensed over the vesting period. Any accelerated vesting of the awards and options requires immediate recognition of the unrecognised portion.

Value of services provided:

Charge relating to grants made at date of listing

58.4

10.8

–	in respect of unvested share awards and options

1.5

10.8

–	vesting of share awards and options resulting from the disposal of its controlling interest by GUS group on 26 May 2005

56.9

–

Options granted subsequent to 26 May 2005

0.3

–

Total share-based payment

58.7

10.8

Significant assumptions used were:

Weighted average share price

41.64

29.85

Weighted average exercise price (for options only)

41.60

28.00

Weighted average expected volatility

28.0%

28.3%

Weighted average expected dividend yield

3.6%

3.9%

Weighted average risk-free rate (bond yield curve at date of grant)

7.9%

8.8%

The expected volatility for the share awards and options granted at the date of listing was based on a weighted average of the volatilities of similar listed entities. The volatilities for the options granted subsequent to 26 May 2005 were based on the volatility of Lewis’s share price from the date of listing to the date of granting the option.

18.3 Share incentive schemes

The employee share incentive schemes are in operation for employees, executives and directors holding salaried employment office. The aggregate number of shares which may be utilised for these schemes shall not exceed 10% of the issued share capital of the company.

Employees receive their share awards and options if they have been in continued employment with the group until the vesting date. Share awards vest between 2 and 5 years of grant date. In respect of options, these vest between 3 and 5 years and must be exercised within 10 years after been granted. In terms of the scheme’s rules, the share awards and options vest immediately, should there be a change in control.

The GUS group made available 4% of its shareholding in the group for no consideration in order to meet the commitment of the share incentive schemes to deliver to the participants as a result of the immediate vesting of the share awards and options as a consequence of the disposal of their controlling interest.

No. of shares

and options

Lewis All Employee Share Scheme

Beginning of year

1 101 254

–

Granted

1 888

1 196 379

Forfeited

(51 825)

(95 125)

Vested

(1 051 317)

–

End of year

–

1 101 254

Lewis Executive IPO Restricted Share Scheme

Beginning of year

1 326 448

–

Granted

5 714

1 379 334

Forfeited

(32 702)

(52 886)

Vested

(1 299 460)

–

End of year

–

1 326 448

Lewis Executive Share Option Scheme

Beginning of year

807 829

–

Granted

188 276

822 850

Forfeited

(71 132)

(15 021)

Exercised by payment of consideration

(83 711)

–

End of year

841 262

807 829

Average exercise price of outstanding options

Options granted in 2005

28.00

28.00

Options granted in 2006

41.60

–

18.4 Directors’ emoluments

Non-executive directors

Fees as directors

D M Nurek

225 000

160 000

H Saven

215 000

128 000

B van der Ross

130 000

89 000

F Abrahams

67 000

–

D Tyler (payable to GUS Holdings BV)

43 500

97 000

Executive director – A J Smart (paid by subsidiary)

3 555 550

3 362 747

Salary

1 690 000

1 536 000

Bonuses

1 444 670

1 436 000

Contributions to pension scheme

270 400

245 760

Contribution to medical aid

32 736

30 939

Other material benefits

117 744

114 048

Share awards and options granted

A J Smart was awarded 219 428 free shares and 219 428 options with an exercise price of R28 on 4 October 2004. These were due to vest evenly in 3, 4 and 5 years from the date of the award. As a consequence of the disposal of its controlling interest by the former holding company, the share awards and options vested immediately. A J Smart agreed in terms of a written undertaking not to dispose of any shares he may become entitled to under these awards prior to 1 October 2007.

19 Bad debts and impairment provision

Bad debts, bad debt recoveries and repossession losses

132.9

125.3

Movement in impairment provision

(17.4)

(23.7)

115.5

101.6

20 Lease commitments

The group leases the majority of its properties under operating

leases. The lease agreements of certain store premises provide for

a minimum annual rental payment and additional payments

determined on the basis of turnover.

Payments on a cash flow basis:

175.7

167.6

Within one year

63.9

67.2

Two to five years

109.6

99.5

Over five years

2.2

0.9

Payments on a straight-line basis:

169.4

158.7

Within one year

64.0

64.8

Two to five years

103.5

93.1

Over five years

1.9

0.8

21 Operating profit is stated after

Surplus on disposal of property, plant and equipment

6.0

4.1

Depreciation

Owned assets

33.2

32.3

Leased assets

1.8

4.6

35.0

36.9

Fees payable:

Investment management fee – insurance investments

1.4

1.2

Outsourcing of IT function

24.4

22.9

25.8

24.1

Operating leases – premises

Operating lease payments on a cash flow basis

80.9

72.0

Lease adjustment

(2.5)

(1.3)

Operating leases on a straight-line basis

78.4

70.7

Auditors’ remuneration

Audit fees

– current year

1.0

0.8

0.1

0.1

– prior year under provision

0.1

0.1

–

Other services

0.7

0.7

–

1.8

1.6

0.1

0.1

22 Investment income

Interest – insurance business

30.8

31.3

–

Dividends from listed investments – insurance business

4.6

3.5

–

Realised profit on disposal of insurance investments

5.8

2.8

–

Impairment of available-for-sale investments

(12.3)

–

Dividends – unlisted subsidiaries

–

165.2

63.6

28.9

37.6

165.2

63.6

23 Net finance costs

23.1 Interest paid

Capitalised finance leases

0.2

0.9

Fellow subsidiary

–

32.8

Bank loans, overdrafts and other

12.5

16.9

Forward exchange contracts

6.0

4.2

18.7

54.8

23.2 Interest earned

Bank

5.9

12.0

Other

–

0.1

5.9

12.1

12.8

42.7

24 Taxation

24.1 Taxation charge

South Africa

224.2

170.7

Foreign

13.4

11.7

Taxation per income statement

237.6

182.4

Comprising:

Normal taxation

Current year

261.1

215.8

Prior year

(2.2)

29.2

Deferred taxation

Current year

(42.0)

(39.6)

Prior year

(0.8)

(28.9)

Rate change

1.8

–

Secondary Tax on Companies

19.7

5.9

Taxation per income statement

237.6

182.4

24.2 The rate of taxation on profit is reconciled as follows:

Profit before taxation

686.3

577.6

161.9

61.2

Taxation calculated at a tax rate of 29% (2005: 30%)

199.0

173.4

47.0

18.4

Disallowed expenditure / (exempt income)

20.1

2.8

(47.0)

(18.4)

Secondary Tax on Companies

19.7

5.9

–

Prior years

(3.0)

0.3

–

Rate change

1.8

–

Taxation per income statement

237.6

182.4

–

Effective taxation rate

34.6%

31.6%

–

25 Earnings per share

25.1 Weighted average number of shares

000’s

000’s

Weighted average shares for earnings and headline earnings per share

97 300

100 000

Dilution resulting from options outstanding

201

–

Weighted average shares for diluted earnings and headline earnings per share

97 501

100 000

Diluted earnings and headline earnings per share is calculated by adjusting the weighted average number of ordinary shares assuming that all share options will be exercised. The dilution is determined by the number of shares that could have been acquired at fair value (determined as the average annual market price of the shares) less the number of shares that would be issued on the exercise of all the share options.

25.2 Headline earnings

Attributable earnings

448.7

395.2

Profit on disposal of property, plant and equipment

(6.0)

(3.9)

Profit on disposal of available-for-sale investments

(5.8)

(2.8)

Impairment of available-for-sale investments

12.3

–

Taxation

2.8

1.6

Headline earnings

452.0

390.1

Cents

Cents

Cents

Cents

25.3 Earnings per share

461.2

395.2

Fully diluted earnings per share

460.2

395.2

25.4 Headline earnings per share

464.5

390.1

Fully diluted headline earnings per share

463.6

390.1

26 Dividends paid

Dividend no.1 declared on 15 November 2004 and paid on 31 January 2005

–

61.0

–

61.0

Dividend no.2 declared on 16 May 2005 and paid on 25 July 2005

74.0

–

74.0

–

Dividend no.3 declared on 14 November 2005 and paid on 30 January 2006

88.0

–

88.0

–

Dividends received on treasury shares:

Lewis Stores (Pty) Ltd

(2.5)

–

Lewis Employee Share Incentive Scheme Trust

(2.6)

–

156.9

61.0

162.0

61.0

27 Notes to the cash flow statements

27.1 Cash generated from operations

Operating profit

670.2

582.7

(3.3)

(2.4)

Adjusted for:

Share-based payments

58.7

10.8

–

Depreciation and amortisation

35.0

36.9

–

Surplus on disposal of property, plant and equipment

(6.0)

(3.9)

–

Movement in debtors impairment provision

(17.4)

(23.7)

–

Movement in retirement benefits provision

3.4

(2.8)

–

Movement in other provisions

9.8

10.7

–

Changes in working capital:

Increase in inventories

(62.0)

(5.5)

–

(Increase)/decrease in trade and other receivables

(152.2)

21.9

–

Increase/(decrease) in trade and other payables

53.7

(1.9)

(0.6)

1.9

593.2

625.2

(3.9)

(0.5)

27.2 Taxation paid

Amount owing at the beginning of the year

(125.6)

(82.4)

Amount charged to the income statement

(237.6)

(182.4)

Adjustment for deferred taxation

(41.0)

(68.5)

Amount owing at the end of the year

159.8

125.6

(244.4)

(207.7)

27.3 Cash and cash equivalents

Cash deposits and cash on hand

28.1

55.3

Overdrafts and short-term interest-bearing borrowings

(132.8)

(172.0)

Cash and cash equivalents

(104.7)

(116.7)

28	Financial risk management
	Executive management meets regularly to assess the group’s currency, credit and interest rate exposure and to decide on strategies for managing the risk. The manner in which the risks are to be managed on a daily basis and limits imposed on management in so doing are set out in a treasury policy which is reassessed and updated at these meetings.
28.1	Credit risk management
	Financial assets, which potentially subject the group to a concentration of credit risk, consist principally of cash at bank, investments and trade receivables. Cash at bank and short-term deposits are placed with high quality financial institutions and South African investments are limited to a maximum of 5% in any one publicly traded security. Trade receivables comprise a large, widespread customer base which is subject to continual and ongoing credit evaluations to determine the level of impairment. The granting of credit is controlled by sophisticated and well-developed application and behavioural scoring models which are continually refined and updated. There are no significant concentrations of credit risk which have not been provided for.
28.2	Interest rate risk management
	Interest rate risk on interest-bearing instruments are managed by an independent asset management company in terms of a regularly updated mandate. As part of the process of managing the fixed and floating rate interest-bearing debt and cash and cash equivalents, the interest rate characteristics of new and the refinancing of existing loans are positioned according to the expected movements in interest rates.

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		Average
		closing
		effective		Carrying
	Term of	interest	Floating	value
	investment	rate %	or fixed	Rm
2006
Assets
Gross instalment sale and loan receivables	Up to 2 years	28.3%	Fixed	2 921.4
Liabilities
Finance leases	3 years	7.0%	Floating	1.8
Overdrafts and short-term borrowings	Varies (refer note 15)	7.2%	Floating	132.8
2005
Assets
Gross instalment sale and loan receivables	Up to 2 years	27.0%	Fixed	2 677.1
Liabilities
Finance leases	3 years	8.0%	Floating	8.9
Overdrafts and short-term borrowings	Varies (refer note 15)	8.2%	Floating	172.0

28.3	Foreign exchange risk management
	During the year, 13.7% (2005: 8.0%) of the purchases were in foreign denominated currencies. Forward exchange contracts are entered into to manage foreign exchange exposure. Below is a summary of the amounts payable under forward contracts.

			Foreign	Rand	Fair value
			currency	equivalent	(gain)/loss
	Term	Rate	FCm	Rm	Rm
2006
US dollar	Less than 9 months	Rates vary from R6.08 to R6.48	10.3	64.1	2.0
2005
US dollar	Less than 4 months	Rates vary from R6.13 to R6.18	1.3	8.2	0.1

Apart from the Linked Policy Investment, there was no uncovered exposure to foreign denominated currencies at year-end. The underlying value of the linked policy is determined in US dollar and this foreign currency exposure is uncovered. Refer note 28.6.

	Net investment in foreign entities
	The currency exposure is limited to the net investment in Botswana of R80.4 million (2005: R94.2 million), which includes a long-term loan account. The currency exposure is managed by keeping the net investment at a minimum practical level by remitting cash to South Africa on a regular basis.
28.4	Liquidity risk

	2006	2005
	Rm	Rm
Total banking facilities	900.0	900.0
Less: drawn portion of facility	(132.8)	(172.0)
Plus: cash on hand	28.1	55.3

Available cash resources and facilities	795.3	783.3

	Prudent liquidity management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities. Group treasury aims to maintain flexibility in funding by keeping committed credit lines available.
28.5	Insurance risk
	The risks covered under insurance contracts entered into with customers by the group’s insurer, Monarch Insurance Company (“Monarch”), are as follows:
	settlement of customer’s outstanding balance in the event of death or disability; replacement of customer’s goods in the event of damage or theft of goods; and settlement of customer’s account, should the customer become unemployed after 3 months subsequent to the sale.
	The risk under any one insurance contract is the possibility that the insured events as detailed above occur and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and therefore unpredictable.
	The principle risk that the group faces is that the actual claims exceed the amount of the insurance provisions. This could occur because the frequency or severity of claims are greater than estimated. Insurance events are random and the actual number of claims will vary from year to year from the estimated claims provision established using historical claims patterns. The frequency and severity of claims can be affected due to unforeseen factors such as patterns of crime, AIDS and employment trends. The group manages these risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. The geographical spread of the group ensures that the underwritten risks are well-diversified. No significant concentrations of insurance risks exist. A proportional re-insurance arrangement has been entered into by Monarch to facilitate the transfer of 40% of the risk under these policies to an external re-insurer. Catastrophe cover has been placed with third-party insurers and re-insurers in order to reduce the potential impact of a single event on the earnings and capital of Monarch. Due to the nature of the insurance risks, claims can be measured reliably. Past experience has indicated that claims provision estimates approximate the actual claims costs. The insurance result is dependent on the trend in the group’s merchandising sales. There is no significant insurance business other than with the group’s customers.

	Group		Company
	2006	2005	2006	2005
	Rm	Rm	Rm	Rm
Movement in provisions:
(i) Unearned premium reserve
Opening balance	154.4	140.4
Movement during year	30.4	14.0
Closing balance	184.8	154.4
(ii) Insurance provisions
Opening balance	19.6	18.1
Movement during year	3.6	1.5
Closing balance	23.2	19.6
Insurance provisions include outstanding claims and IBNR reserve.

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Average

closing

rate of

interest

0-12

2-5

months

years

Total

28.6 Maturity profile of financial instruments

The maturity profiles of financial instruments at

31 March 2006 are as follows:

Assets

Available-for-sale insurance investments

–

318.6

159.4

478.0

Held-to-maturity insurance investments

7.1%

111.9

–

111.9

Trade and other receivables **

28.3%

1 896.5

–

1 896.5

Cash on hand and deposits

6.2%

28.1

–

28.1

Liabilities

Interest-bearing borrowings

7.0%

(0.8)

(1.0)

–

(1.8)

Bank overdrafts and short-term borrowings

7.2%

(132.8)

–

(132.8)

Trade and other payables

(283.5)

–

(283.5)

1 619.4

317.6

159.4

2 096.4

**	Amounts due from instalment sale receivables after 1 year are reflected as current, as they form part of the normal operating cycle. The credit terms of instalment sale receivables range from 6 – 24 months.

On 31 March 2006 the carrying amounts of other receivables, bank balances and cash on hand, trade and other payables and overdraft and short-term borrowings approximate their fair values due to the short-term maturity of the assets and liabilities.

Included in “Cash on hand and deposits” are bank balances held in foreign currency (Pula) amounting to R18.2 million (2005: R47.7 million).

Included in “Available-for-sale investments” is a linked investment policy with Sanlam Life Insurance Limited made by Monarch Insurance Company Limited, the group’s insurance subsidiary. The underlying value of the policy is determined in US dollars with reference to the original investment and a growth in a basket of international indices. The underlying indices are 65% foreign equity and 35% government bonds and the policy carries both a R68 million and US dollars 10.4 million capital guarantee effective if the investment is held to 6 November 2007.

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		Group		Company
		2006	2005	2006	2005
		Rm	Rm	Rm	Rm
29	Related party information
	The group, in the ordinary course of business, enters into transactions with related parties. These transactions occur on terms no more favourable than those entered into with third parties in arm’s length transactions.

29.1	Dealings with executives
	Remuneration of executives	12.2	10.3
	Salary	6.2	5.3
	Bonus	4.3	3.5
	Contributions to pension fund	1.0	0.9
	Contributions to medical aid	0.3	0.2
	Other benefits	0.4	0.4

	Key executives comprise the directors of Lewis Stores (Pty) Ltd, the main operating subsidiary.

29.2	Amounts attributable to transactions with related entities
	Income
	Re-insurance commission received from: common-controlled entity
	(Commission arising from the re-insurance business written)	–	41.1
	IPO fee recovery	–	13.7
	Expenses
	Interest paid to: common-controlled entity	–	32.8
30	Contingencies
	Bank and other guarantees given by the group to third parties	7.5	5.1
	The directors are of the opinion that no loss will be incurred on these guarantees.
31	Capital Commitments
	There were no material capital commitments contracted for or authorised and contracted at the end of the year under review (2005 – Rnil).

2006

2005

Merchandise

Insurance

Group

Merchandise

Insurance

Group

32 Segmental reporting

32.1 By business unit

Revenue

2 474.0

400.5

2 874.5

2 153.6

357.6

2 511.2

Operating profit ¹

564.9

163.7

728.6

449.7

143.8

593.5

Operating assets ²

2 288.3

602.0

2 890.3

2 116.9

510.1

2 627.0

Operating liabilities

191.4

92.1

283.5

146.2

79.0

225.2

Capital expenditure

39.8

–

39.8

37.4

–

37.4

Depreciation

35.0

–

35.0

36.9

–

36.9

2006

2005

South Africa

Other

Group

South Africa

Other

Group

32.2 Geographical

Revenue

2 575.0

299.5

2 874.5

2 229.1

282.1

2 511.2

Operating assets ²

2 656.3

234.0

2 890.3

2 363.4

263.6

2 627.0

Capital expenditure

36.9

2.9

39.8

35.0

2.4

37.4

¹	Operating profit excludes share-based payments of R58.4 million (2005: R10.8 million) relating to the share awards and options granted at date of listing.
²	Operating assets does not include deferred tax asset of R89.7 million (2005: R48.7 million).

32.3 Inter-segment transfers

Segment revenues, expenses and results include transfers between business segments and between geographical segments. Such transfers are accounted for at arm’s length prices.

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annual financial statements

notes to the annual financial statementsfor the year ended 31 March 2006

1

Basis of preparation

1.1

Basis of consolidation

1.2

Goodwill

1.3

Foreign currency translations

1.3.1

Functional and presentation currency

1.3.2

Foreign currency transactions and balances

1.3.3

Foreign entities

1.4

Financial instruments

1.4.1

Cash and cash equivalents

1.4.2

Derivative instruments

1.4.3

Financial assets

1.4.4

Trade and other receivables

1.4.5

Financial liabilities

1.4.6

Set-off

1.5

Property, plant and equipment

1.6

Leased assets

1.7

Inventories

1.8

Impairment of non-financial assets

1.9

Deferred taxation

1.10

Provisions

1.11

Insurance business

1.11.1

Outstanding claims

1.11.2

Contingency reserve

1.11.3

Provision for unearned premiums

1.12

Segmental information

1.13

Current assets and liabilities

1.14

Share capital

1.15

Employee benefits

1.15.1

Retirement plans

1.15.2

Post-retirement health care costs

1.15.3

Share-based payments

1.15.4

Provision for leave pay

1.16

Borrowings

1.17

Trading cycle

1.18

Revenue recognition

2

Critical accounting estimates and judgements

2.1

Impairment of receivables

2.2

Bad debts

2.3

Share-based payment

notes to the annual financial statements
for the year ended 31 March 2006