financial statements
financial statements: notes to the annual financial statements
for the year ended 31 March 2009
| 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. The following new or revised IFRSs and interpretations have become applicable to the 2009 financial statements: IFRIC 14: The limit on a defined benefit asset and minimum funding requirements IFRS 7 and IAS 39 amendments: Reclassification of Financial Assets The implementation of these interpretations and amendments to the standards did not have a significant impact on the group’s results and cash flows for the year ended 31 March 2009 and the financial position as at 31 March 2009. The following standards, amendments to standards and interpretations, which have been issued but which are not yet effective, have not been applied in these financial statements: IFRS 2: Share-based Payment (amendment) IFRS 3: Business Combinations (revised) IFRS 7: Financial Instruments: Disclosure (amendment) IFRS 8: Operating Segments IAS 1: Presentation of Financial Statements (revised) IAS 10: Events after the reporting period (amendment) IAS 16: Property, plant and equipment (amendment) IAS 18: Revenue (amendment) IAS 19: Employee Benefits (amendment) IAS 27: Consolidated and Separate Financial Statements (revised) IAS 34: Interim Financial Reporting (amendment) IAS 36: Impairment of assets (amendment) IAS 39: Financial Instruments: Recognition and Measurement (amendment) IFRIC 13: Customer loyalty programmes AC 504: Limit on a defined benefit asset and minimum funding requirements and their interaction in the South African pension fund environment. 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. |
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| 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. The purchase method of accounting is used to account for the acquisition of subsidiaries by the group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of the exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the group’s share of the identifiable net assets is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets acquired, the difference is recognised directly in the income statement. 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. |
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| 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. |
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| 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 company’s functional currency and the group and company’s presentation currency. |
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| 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. Exchange profits and losses arising from the translation of monetary assets and liabilities at balance sheet date or on subsequent settlement of these monetary items are recognised in the income statement in the period in which they arise. |
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| 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, a separate component of equity. On disposal of a foreign subsidiary, such translation differences are recognised in the income statement as a gain or loss on the sale. |
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| 1.4 | Financial instruments | |||||||||||||||||||
| 1.4.1 | Cash and cash equivalents Cash and cash equivalents comprise cash on hand and deposits held on call with banks and bank overdrafts. Bank overdrafts are included in short-term interest-bearing borrowings. Cash and cash equivalents are recognised initially at fair value and are subsequently re-measured at amortised cost using the effective interest rate. |
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| 1.4.2 | Derivative instruments Derivative instruments are utilised to hedge exposure to foreign currency and interest rate fluctuations. Derivatives are recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Although the derivative instruments entered into by the group provide an effective economic hedge, these derivative instruments have been classified as fair value through profit and loss and, consequently, changes in the fair value are recognised immediately in the income statement. |
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| 1.4.3 | Financial assets Investments are classified into three categories, based on the purpose for which the investment was acquired. The classification is determined on initial recognition. Derivative instruments are accounted for in terms of note 1.4.2. The investments are classified as follows: |
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| (i) | Financial assets designated as fair value through profit and loss. A financial asset is classified
as such where the asset is acquired principally for the purpose of selling in the short term.
Assets in this category are classified as current assets where expected to be realised within
twelve months of balance sheet date. |
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| (ii) | Available-for-sale assets are assets acquired with the intention of being held indefinitely or
those assets that cannot be classified in any of the other categories of financial instruments.
Available-for-sale financial assets are included in non-current assets, unless management
intends to dispose of the investment within twelve months of the balance sheet date. |
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| (iii) | Held-to-maturity investments are financial assets with fixed or determinable payments and
fixed maturities where management has the positive intention and ability to hold to maturity.
Held-to-maturity investments are carried at amortised cost using the effective interest rate
method. If the group were to sell these assets, the whole category of such assets would be
reclassified as available-for-sale. |
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| 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. Assets
designated as fair value through profit and loss and as available-for-sale are subsequently
carried at fair value and are valued by reference to quoted bid prices at the close of business
on the balance sheet date or, where appropriate, by discounted cash flow with maximum use of
market inputs. 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. |
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| 1.4.4 | Trade and other receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate, less a provision for doubtful debts. The provision for doubtful debts is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Changes in the provision are recognised in the income statement. |
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| 1.4.5 | Financial liabilities | |||||||||||||||||||
| (i) | Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. |
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| (ii) | Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method. |
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| 1.4.6 | Set-off Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. |
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| 1.5 | Property, plant and equipment Property, plant and equipment are carried at cost less accumulated depreciation. The assets’ residual values and useful lives are reviewed and adjusted, if appropriate, at each balance sheet date. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are capitalised when it is probable that future economic benefits will arise and the cost can be measured reliably. 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:
Land is not depreciated. Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds to the carrying amount and are recognised in the income statement. |
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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 straightline basis over the lease term. |
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| 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. |
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| 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. |
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| 1.9 | Current and deferred taxation The tax expense comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised directly in equity. In this case, the tax is also recognised in equity. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at balance sheet date in the countries where the company and its subsidiaries operate and generate taxable income. The group periodically evaluates positions taken in tax returns with respect to situations in which applicable legislation and regulations are subject to interpretation. Appropriate provisions are established on the basis of amounts expected to be paid to the tax authorities. 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 tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred taxation is calculated at current or substantially enacted rates of taxation at balance sheet date. 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. |
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| 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. |
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| 1.11 | Insurance business | |||||||||||||||||||
| 1.11.1 | Classification Insurance contracts are those contracts that transfer significant risk. The group defines significant insurance risk as the possibility of having to pay benefits on the occurrence of an insured event in terms of the cover given to the insured. Contracts entered into by the company with reinsurers under which the group’s insurer is compensated for losses on contracts issued by it and that meet the requirements for insurance contracts are classified as reinsurance contracts held. Insurance contracts entered into by the group’s insurer under which the contract holder is another insurer (inwards reinsurance) are included with insurance contracts. |
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| 1.11.2 | 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 insurance contingencies that occurred before the close of the accounting period, but which had not been reported by that date. Claims and expenses are charged to income as incurred, based on the estimated liability for compensation owed to insurance policyholders. The group’s own assessors individually assess claims. Outstanding claims provisions are not discounted. |
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| 1.11.3 | 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. |
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| 1.11.4 | Provision for unearned premiums The provision for unearned premiums and the reinsurer’s share of unearned premiums represents that part of the current year’s premiums relating to risk periods that extend to the subsequent years. The unearned premiums are calculated on a straight-line basis over the period of the contract. |
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| 1.11.5 | Reinsurance Income from reinsurance contracts is deferred over the period of the related reinsurance contract and is recognised as a current liability. The reinsurer’s share of insurance provisions is dependent on the expected claims and benefits arising under the related reinsured insurance contracts and is measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of the reinsurance contract. Reinsurance liabilities are primarily premiums payable for reinsurance contracts. |
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| 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. The group’s main segments are: |
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| (i) | Retail The retail segment encompasses the sale of merchandise, delivery and maintenance contracts. |
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| (ii) | Financial services Financial services cover the management and collection of the debtors book. Revenue earned includes finance charges, initiation and service fees charged on customer accounts. |
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| (iii) | Risk services Risk services cover the insurance activities of the group. |
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| 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 36 months but are classified as current as they form part of the normal operating cycle. |
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| 1.14 | Treasury shares 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. The weighted average number of shares is reduced by the treasury shares for earnings per share purposes. Dividends received on treasury shares are eliminated on consolidation. |
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| 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 projected 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 for 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. |
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| 1.15.2 | 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. |
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| 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 nonmarket service and performance vesting conditions. Non-market vesting conditions are included in the assumptions about the number of options that are expected to become exercisable. The total amount expensed is recognised over the vesting period, which is the period over which all vesting conditions are to be satisfied. 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. |
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| 1.15.4 | Leave pay accrual Employee entitlements to annual leave are recognised as they accrue to employees. An accrual is made for the estimated liability for annual leave as a result of services provided by employees up to the balance sheet date. |
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| 1.16 | 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. |
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| 1.17 | Revenue recognition Revenue is recorded at the fair value of the consideration received or receivable and 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. |
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| (i) | Merchandise sales Revenue from the sale of merchandise is recognised on the date of delivery. |
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| (ii) | Finance charges earned For contracts entered into prior to the implementation of the National Credit Act (“NCA”), finance charges are recognised on a sum-of-digits basis which closely approximates the effective yield basis. For contracts entered into subsequent to the implementation of the NCA, finance charges are recognised by reference to the daily principle outstanding and the effective interest rate implicit in the agreement. |
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| (iii) | Insurance premiums earned Insurance premiums are recognised on a straight-line basis over the period of the contract, after an appropriate allowance is made for commission and reinsurance cost. |
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| (iv) | Ancillary services Revenue from maintenance contracts is recognised over a 24-month period to ensure a reasonable profit margin. Initiation fees and directly related costs are recognised over the period of the contract on an effective yield basis. Revenue from the provision of other services is recognised when the services are rendered. |
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| (v) | Interest and dividends Interest on investments is recognised on a time proportion basis taking into account the effective yield on the assets. Dividends are recognised when the right to receive payment is established. |
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| 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: |
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| 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. |
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| 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. |
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| 2.3 | Share-based payment 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 17.2. |
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| 2.4 | Normal and deferred taxation 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. |
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| 2.5 | Retirement benefits The underlying actuarial assumptions are set out in note 12. |
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| 2.6 | Useful lives and residual values of fixed assets The estimated useful lives and residual values are reviewed annually taking cognisance of historical trends for that class of asset and the commercial and economic realities at the time. |
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