annual report 2009

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financial statements: notes to the annual financial statements
for the year ended 31 March 2009

			Group
			2009	2008
			Rm	Rm
11.	Deferred taxation
	Balance at the beginning of the year		14.4	(77.5)
	Movement for the year attributable to:
	Income statement credit		46.0	103.9
	Deferred tax on fair value adjustment in equity		(7.4)	(12.0)
	Balance at the end of the year		53.0	14.4
	This balance comprises:
	Capital allowances		20.9	28.4
	Debtors allowances		75.0	19.5
	Income and expense recognition		(1.7)	2.2
	Other provisions		(41.2)	(35.7)
	Balance at the end of the year		53.0	14.4
12.	Retirement benefits
	Amounts recognised in the balance sheet
	Defined benefit retirement plan liability		11.2	16.9
	Post-retirement healthcare benefits		42.7	40.8
			53.9	57.7
	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:		No. of Employees
	Lewis Group Pension Fund		273	311
	Lewis Stores Retirement Pension Fund		32	32
	Lewis Stores Provident Fund		3 074	2 888
	Lewis Stores Namibia Provident Fund		124	118
	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 IAS 19 using the projected unit credit method. The latest valuation was carried out as at 1 January 2009.
			2009	2008
			Rm	Rm
	Amounts recognised in the balance sheet
	Present value of obligations		331.0	345.8
	Fair value of plan assets		(324.6)	(362.1)
			6.4	(16.3)
	Unrecognised actuarial gains		4.8	33.2
	Defined benefit retirement plan liability		11.2	16.9
	Amounts recognised in the income statement
	Current service cost		11.4	11.1
	Interest cost		28.8	25.5
	Expected return on plan assets		(35.1)	(30.6)
	Net actuarial losses recognised in the year		2.5	1.6
	Total included in staff costs		7.6	7.6
	Movement in retirement benefit liability
	Present value at the beginning of the year		16.9	27.1
	Income statement charge		7.6	7.6
	Contributions paid during the year		(13.3)	(17.8)
	Present value at the end of the year		11.2	16.9
	Present value of defined benefit obligations
	Beginning of year		345.8	303.2
	Current service cost		11.4	11.1
	Interest cost		28.8	25.5
	Employee contributions		1.7	1.8
	Benefit payments		(36.6)	(18.1)
	Actuarial loss		(20.1)	22.3
	End of year		331.0	345.8
	Fair value of defined benefit plan assets
	Beginning of year		362.1	305.6
	Employee contributions		1.7	1.8
	Employer contributions		13.1	17.8
	Expected return		35.1	30.6
	Benefit payments		(36.6)	(18.1)
	Actuarial gain		(50.8)	24.4
	End of year		324.6	362.1
	Principal actuarial assumptions used were as follows:
	Discount rate		9.00%	9.50%
	Expected return on plan assets		10.00%	10.00%
	Inflation rate		6.00%	6.50%
	Future salary increases		7.00%	7.75%
	Future pension increases		6.50%	6.50%
	Assumptions regarding future mortality experience are based on advice, published statistics and experience. The average life expectancy in years of a pensioner retiring at age 65 on valuation date is as follows:
	Male		13.7 years	12.6 years
	Female		15.7 years	14.0 years
	Actual return on plan assets		(5.4%)	18.2%
	The employer’s future contribution is set on an annual basis in consultation with the fund’s actuary.
	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		18.8	17.5
	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 2009 by a qualified actuary in accordance with the requirements of IAS 19. The group has a commitment to meet these unfunded benefits.
	Amounts recognised in the income statement
	Current service cost		0.9	0.9
	Interest cost		3.3	2.9
	Actuarial gain		(0.4)	(1.6)
	Income statement charge		3.8	2.2
	Movement in post-retirement healthcare liability
	Present value of liability at the beginning of the year		40.8	40.5
	Charged to income statement		3.8	2.2
	Employer benefit payments		(1.9)	(1.9)
	Post-retirement healthcare benefits liability		42.7	40.8
			2009	2008
			Rm	Rm
	Present value of post-retirement healthcare obligations
	Beginning of year		40.8	40.5
	Current service cost		0.9	0.9
	Interest cost		3.3	2.9
	Benefit payments		(1.9)	(1.9)
	Actuarial gain		(0.4)	(1.6)
	End of year		42.7	40.8
	Principal actuarial assumptions used were as follows:
	Healthcare inflation rate		5.75%	5.50%
	CPI inflation		5.75%	5.50%
	Discount rate		9.00%	8.75%
	Average retirement age (years)		63	63
	Sensitivity		Increase	Decrease
	The effects of a 1% movement in the assumed medical aid inflation rate were as follows:
	Effect on aggregate of the current service and interest cost		0.7	(0.5)
	Effect on defined benefit obligation		5.8	(4.8)
				Experience
				adjustments
	Trends		Obligation	gain/(loss)
	The trends of the present value of the obligation and experience adjustments are as follows:
	2009		42.7	0.2
	2008		40.8	0.2
	2007		40.5	2.4
	2006		41.2	4.9
	2005		34.7	(2.7)
	2004		30.8	2.0
			2009	2008
			Rm	Rm
13.	Trade and other payables
	Trade payables		84.8	59.6
	Accruals and other payables		142.9	107.3
	Due to reinsurers		105.3	102.7
	Insurance provisions		71.1	32.8
			404.1	302.4
14.	Short-term interest-bearing borrowings
	These borrowings are unsecured. The average closing interest rate on these borrowings was 12.08% (2008: 12.76%).		637.0	703.4
			637.0	703.4
15.	Insurance premiums earned
	Gross insurance premiums		645.8	615.3
	Reinsurance commission		197.3	203.4
	Reinsurance premiums		(261.7)	(254.5)
			581.4	564.2
16.	Cost of merchandise sales
	Purchases		1 315.9	1 272.2
	Movement in inventory		2.4	(0.1)
	Cost of merchandise sales		1 318.3	1 272.1
	Merchandise gross profit		601.6	617.6
17.	Directors and employees
17.1	Employment costs
	Salaries, wages, commissions and bonuses		493.9	466.3
	Retirement benefit costs		30.2	27.3
	Share-based payments		10.6	6.7
	Other employment costs		3.7	3.9
			538.4	504.2
17.2	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 options and shares is measured at the grant date using the Black-Scholes model.  In terms of IFRS 2, 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:
	In respect of share awards and options granted subsequent to date of listing (refer note 17.3)		10.6	6.7
			R	R
	Significant assumptions used were:
	Weighted average share price		47.52	56.40
	Weighted average expected volatility		48.7%	42.6%
	Weighted average expected dividend yield		6.5%	4.4%
	Weighted average risk-free rate (bond yield curve at date of grant)		9.7%	8.7%
	The volatilities for the options granted after the date of the listing were based on the volatility of Lewis’ share price from the date of listing to the date of granting the share awards and options.
17.3	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.
	Lewis All Employee Share Scheme		No. of shares and options
	In terms of the rules of the share scheme, participants are granted an award to receive shares for no consideration. Participants will only receive their share award if they remain in the employ of the group until vesting date. Share awards under this scheme usually vest between two and four years.
	Beginning of year		–	–
	Granted		6 080	–
	Forfeited		–	–
	Vested and exercised by payment of consideration		–	–
	End of year		6 080	–
	Lewis Executive Share Option Scheme
	Share options are granted to selected executives. The exercise price of the options is the average market price for the last three days, including the date of the grant or, in respect of options granted at date of listing, the listing price of the group’s shares. Options vest between three and five years and must be exercised within 10 years after been granted. In terms of the scheme’s rules, the options vest immediately, should there be a change in control.
	Beginning of year		–	662,416
	Granted		–	–
	Forfeited		–	–
	Vested and exercised by payment of consideration		–	(662,416)
	End of year		–	–
	Lewis Executive Performance Scheme
	In terms of the scheme, senior executives have been offered the right to acquire shares of the group for no consideration subject to the achievement of performance targets. The shares will vest after three years and is conditional upon the executive still being in the employ of the company other than in the event of death, ill-health, retirement or retrenchment.  The performance targets are set by the Remuneration and Nomination Committee and are approved by the Board. These targets will be set at the beginning of each of the three years and a proportionate number of the shares granted will be allocated to each year.  No performance shares will accrue if the group achieves less than 90% of target. Any achievement between 90% and 100% of target will result in a proportionate accrual of shares weighted towards 100% of target.
	Beginning of year		294 312	185 639
	Granted		287 747	184 270
	Forfeited		(5 333)	(52 648)
	Vested		(3 755)	(22 949)
	End of year		572 971	294 312
	Lewis Co-investment Scheme
	Senior executives are eligible for an annual bonus based on achievement of performance targets. These eligible executives can elect to invest all or part of their net bonus in the group’s shares (“invested shares”). These shares are deferred for three years and matching shares equal to the before tax bonus are awarded for no consideration at the end of the period. The matching share award will lapse, should the executive terminate his or her employment before the completion of the three year period other than in the event of death, ill-health, retirement or retrenchment. The grant in respect of the matching share option is as follows:
	Beginning of year		167 321	89 322
	Granted		50 214	88 179
	Forfeited		–	(3 393)
	Vested		–	(6 787)
	End of year		217 535	167 321
	Invested shares paid for through the investment of executives’ net bonuses amounted to 130 518 shares (2008: 106 498 shares). These shares are held by the Trust on the executives’ behalf.
			2009	2008
			R	R
17.4	Directors’ emoluments
	Non-executive directors – fees as directors
	D M Nurek		533 000	495 000
	H Saven		372 000	341 000
	B van der Ross		273 000	253 000
	F Abrahams		273 000	253 000
			1 451 000	1 342 000
	Executive director – A J Smart (paid by subsidiary)
	Salary		2 440 000	2 240 000
	Bonuses		1 120 000	2 000 000
	Contributions to pension scheme		390 400	358 400
	Contribution to medical aid		46 488	42 000
	Other material benefits		158 400	158 400
	Gains on options		–	4 799 673
			4 155 288	9 598 473
	Executive director – L A Davies (paid by subsidiary)
	Salary		1 283 335	1 100 000
	Bonuses		550 000	900 000
	Contributions to pension scheme		205 333	176 000
	Contribution to medical aid		66 289	50 475
	Other material benefits		172 320	161 520
	Gains on options		–	1 094 652
			2 277 277	3 482 647
	Gains on options – executive directors
	A J Smart
	Options exercised		–	219 428
	Offer date		–	4 Oct 2004
	Date exercised		–	25 May 2005
	Date of release from undertakings not to dispose of shares		–	12 Nov 2007
	Exercise price (R)		–	28.00
	Exercise cost (R)		–	6 143 984
	Sale proceeds/market value of shares transferred (R)		–	10 943 657
	Gain		–	4 799 673
	L A Davies
	Options exercised		–	50 000
	Offer date		–	4 Oct 2004
	Date exercised		–	26 May 2005
	Date of release from undertakings not to dispose of shares		–	12 Nov 2007
	Exercise price (R)		–	28.00
	Exercise cost (R)		–	1 400 000
	Sale proceeds (R)		–	2 494 652
	Gain		–	1 094 652
			2009	2008
			No. of shares/options
	Outstanding share awards and options – executive directors
	Share awards under Lewis Executive Performance Scheme granted (refer note 17.3):
	Granted on 30 June 2006:
	A J Smart		44 753	44 753
	L A Davies		22 287	22 287
	Granted on 11 June 2007:
	A J Smart		34 718	34 718
	L A Davies		17 049	17 049
	Granted on 24 June 2008:
	L A Davies		35 057
	Matching share options under Lewis Co-Investment Scheme (refer note 17.3):
	Granted on 30 June 2006:
	A J Smart		36 344	36 344
	L A Davies		12 044	12 044
	Granted on 19 June 2007:
	A J Smart		30 756	30 756
	L A Davies		13 840	13 840
	Granted on 24 June 2008:
	L A Davies		16 345
	The Trust holds 65 596 shares (2008: 55 789 shares) on their behalf by virtue of the investment of their bonuses into the scheme.
			2009	2008
			Rm	Rm
17.5	Remuneration of key executives
	Salary		9.0	7.3
	Bonus		3.5	6.3
	Retirement and medical contributions		1.4	1.5
	Other benefits		1.3	0.7
			15.2	15.8
	Key executives comprise the directors of Lewis Stores (Pty) Ltd, the main operating subsidiary.
18.	Debtor costs
	Bad debts, repossession losses and bad debt recoveries		201.9	172.1
	Movement in doubtful debts provision		136.9	18.3
			338.8	190.4
19.	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:
	Within one year		96.3	90.4
	Two to five years		181.5	208.7
	Over five years		–	–
			277.8	299.1
	Payments on a straight-line basis:
	Within one year		95.0	92.0
	Two to five years		166.5	193.7
	Over five years		–	0.1
			261.5	285.8
20.	Operating profit is stated after
	Initiation and service fees on accounts receivable		185.1	95.7
	Surplus on disposal of property, plant and equipment		3.6	4.5
	Depreciation
	Owned assets		45.8	40.9
	Leased assets		–	–
			45.8	40.9
	Fees payable:
	Investment management fee – insurance investments		2.0	1.8
	Outsourcing of IT function		33.5	28.7
			35.5	30.5
	Operating lease payments on a cash flow basis		118.2	105.9
	Lease adjustment		2.7	4.9
	Operating leases on a straight-line basis		120.9	110.8
	Auditors’ remuneration
	Audit fees – current year		1.4	1.4
	– prior year underprovision		0.2	0.2
	Other services		0.4	0.3
			2.0	1.9