PROVISIONAL CONDENSED REVIEWED CONSOLIDATED FINANCIAL STATEMENTS and cash dividend declaration for the year ended 30 September 2020

Notes

For the year ended 30 September 2020

1. Basis of preparation

These provisional condensed reviewed condensed consolidated financial statements(condensed financial statements) have been prepared in compliance with the:


These condensed consolidated financial statements contain the minimum information as required by IAS 34 Interim Financial Reporting and were compiled under the supervision of NA Thomson CA(SA) Chief Financial Officer.

The Group's accounting policies applied for the year ended 30 September 2020, were consistent with those applied in the prior year's audited consolidated annual financial statements, except for the impact of the first time adoption of IFRS 16 Leases, the impact of which is set out in Note 13, and IFRIC 23. IFRIC 23 did not have an impact on the 2020 financial year. These accounting policies comply with IFRS.

The condensed consolidated financial statement for the year ended 30 September 2020 have been reviewed by Deloitte and Touche who have expressed an unmodified review conclusion.

Rm Reviewed
2020
Audited
2019

2. Revenue

Revenue from contracts with customers:
Category of revenue
Products 6 014 8 703
Services 1 581 1 482
7 595 10 185
Timing of revenue recognition:
Revenue recognised at a point in time 6 215 8 732
Revenue recognised over time 1 380 1 453
Total revenue from contracts with customers
7 595 10 185
Other revenue:
Interest received on leases and loans receivable 412 425
Rental revenue 39 104
Total
8 046 10 714

Refer to the segmental analysis, for a disaggregation of the total revenue contribution by each segment.

Rm Reviewed
2020
Audited
2019

3. Operating profit

Included in operating profit are the following:
Cost of sales 5 377 7 457
Less: depreciation and amortisation included in cost of sales2 (58) (58)
Cost of sales before depreciation and amortisation            5 319 7 399
Other income3 35 80
Fair value remeasurement on contingent consideration 2 4
Total operating expenses  1 813 1 958
Impairment of financial assets
Credit write-off 298  - 
Expected credit losses 288 22
Less: depreciation and amortisation included in operating expenses2 (182) (107)
Total operating expenses before depreciation and amortisation 2 217 1 873
Included in cost of sales, other income or expenses: 
Profit on disposal of property, plant and equipment 4 2
Auditors remuneration
- Audit fees 28 24
- Other fees 1 3
  29 27
Realised forex losses4 42 66
Unrealised forex losses/(gains)4 48 (92)
Net forex losses / (gains) 90 (26)
Research and development expenditure:
Externally funded 153 132
Internally funded 19 20
  172 152
Employee costs (included in cost of sales and other operating expenses):
Salaries and wages5 1 600 1 874
Pension and provident fund contributions5 192 198
Other staff costs 81 94
  1 873 2 166
Share-based payment expense6 7 21
Write-down of inventory               5 2
1 Additional disclosures have been incorporated to ensure alignment between this note and the annual financial statements. There have been no changes to actual numbers disclosed in the prior year.
2 Depreciation and amortisation of property, plant and equipment and intangible assets that is considered to be part of cost of sales amounts to R50 million (2019: R58 million).
Depreciation of right-of-use assets considered to be part of cost of sales is R8 million (2019: not applicable).
Depreciation and amortisation of property, plant and equipment and intangible assets included in other expenses is R119 million (2019: R107 million).
Depreciation of right-of-use assets included in to other expenses is R63 million (2019: not applicable).
3 Includes a put option liability fair value remeasurement loss of R3 million (2019: R9 million gain).
4 Transactions denominated in a foreign currency are recorded at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Exchange differences on monetary items are recognised in the statement of profit or loss in the period in which they arise. Derivative instruments are initially measured at fair value at the date the derivative contract is entered into and are subsequently stated at fair value at each reporting date. The resulting gains or losses are recognised in the statement of profit or loss.
5 Payments to defined contribution retirement plans are charged as an expense as they fall due.
6 Included in share-based payment expense is a credit of R3 million (2019: a debit of R9 million) relating to the Deferred Bonus Plan. This is classified as a cash-settled, share-based payment with the equivalent amount included in liabilities.

 

Rm Reviewed
2020
Audited
2019

4. Interest income and dividends

Dividend income                   3                              -  
Interest earned on financial assets analysed by category of asset:
Bank deposits                 31                             34
Other assets                   7                             10
Total interest income and dividends
                41                             44
Interest expense
Loans, bank overdrafts and short-term facilities                (53)                            (50)
Lease liability interest                (22)                              -  
Unwinding of discount of put option liability                  (8)                              (9)
Interest expense as per the statement of profit or loss
               (83)                            (59)
External interest expense in Quince (included in Group cost of sales as Quince is a finance business)                (28)                            (13)
Total interest expense using the effective interest rate method
             (111)                            (72)

5. Impairment of financial assets

   
Credit write-off in Quince 298
Expected credit loss 288 22
  586 22

 

Analysis of movement in the ECL
         
Rm Opening balance  Raised during
the year
through the
statement of
profit or loss
Utilized during the year Foreign exchange Closing balance
2020          
Leases and loans receivable 41 219 (50) - 210
Trade and other receivables 150 69 (14) (13) 192
Credit write-off for leases and loans receivable   298      
Total impairment of financial assets disclosed in the statement of profit or loss   586      

The credit write-off resulted from an external fraud perpetrated against Quince Capital (Quince) by a non-connected independent third party dealer. A comprehensive external forensic investigation has been completed and has resulted in a credit write-off of R298 million, which was reported as part of the 31 March 2020 financial results. In the period since the 31 March 2020 published results the following actions have been completed:

Rm Revised opening balance* Raised during the year through the statement of profit or loss Utilized during
the year
Foreign exchange Closing balance
2020          
Leases and loans receivables 38 12                              (9)                    -   41
Trade and other receivables 152 6                              (8)                    -   150
Credit write-off for trade and other receivables                  4                                      
Total impairment of financial assets disclosed in the statement of profit or loss   22      
* After the IFRS 9 transitional adjustment.  

Leases and loans receivable

The gross finance leases receivable relate to the present value of rental agreements discounted at the interest rate implicit in the agreements. These are entered into between Group-owned office automation franchises and the customer, which are repayable over varying periods up to a maximumof five years from inception of the agreement.

Notwithstanding that Quince purchases the underlying leases, and that ownership of the underlying asset is transferred to Quince on this acquisition, the arrangement between Quince and the non-owned franchise is for accounting purposes treated as a loan.

The Group applies the IFRS 9 general approach to measuring the expected credit losses (ECL) for leases and loans receivable.

This is calculated by applying a historical loss ratio to the balance of leases and loans receivable at each reporting date. The loss ratio for the leases and loans receivable is calculated according to the ageing/payment profile by applying historic write-offs to the payment profile of the population.

The historic loss ratio is then adjusted for forward looking information to determine the ECL at the reporting date, to the extent that there is a strong correlation between the forward looking information and the ECL.

Impact of COVID-19

Historical levels of credit impairment are now not considered representative of what is expected in terms of future defaults due to the COVID-19 pandemic. The impact of the national 'lockdown and the related significant reduction in economic activity and consequential predicted increase in business failures have made the estimation of future credit 'losses complex.

Historical methods used in the past have been modified due to changes in the macro economic conditions and the inter-relationship between key economic variables. For example, in the past when interest rates declined this would have been expected to have resulted in fewer defaults occurring. However, under 'COVID-19, defaults are expected to significantly increase despite the substantial decrease in interest rates.

Credit losses which rose by a factor of 2 post the 2008 financial crisis are expected to increase by factors of between 2 and 4 due to the impact of COVID-19.

In South Africa, the decline in economic activity is expected to be longer and recovery is forecast to be slower when compared to the global financial crisis. This impact is predicted to be particularly severe for smaller and medium-sized enterprises, which underpin a material portion of Quince's rental book.

Assets on which the loans and leases are based are likely to be less valuable and take longer to realise as more assets may become available into an environment of both 'weak demand due to the weakened economy and stretched balance sheets as a result of the COVID-19 pandemic.

The Group has considered the factors outlined above and used the following key assumptions in estimating the ECL as at 30 September 2020

Probability of default (PD) 9,3%
Loss given default (LGD) 63%
Exposure at default (EAD) Exposure of receivables at 30 September 2020

 

In estimating the PD the following estimates and judgements were applied:

The PD estimate of 9,3% is further corroborated by the following:

The LGD rate used was obtained from the quoted recovery rate of the World Bank for South African debt of 37%. This was corroborated against the Moody's recovery rate for emerging markets. Due to the uncertainty of the impact for South Africa, this is currently the best independent and credible information available.

In estimating the expected LGD and given the scale of the predicted credit losses, the Group has increased the LGD to 63%.

Significant increase in credit risk

In assessing whether the credit risk on a financial asset has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial asset as at the reporting date with the risk of a default occurring on the financial asset as at the date of initial recognition. In making this assessment, the Group considers quantitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort. In assessing the stage categorisation, receivables that are 30 days overdue are classified as stage 2 and receivables that are 90 days overdue are classified as stage 3.

Due to the impact of COVID-19 and the resulting increase in credit risk as well as the known events, the following is a categorisation of the different stages in accordance with IFRS 9.

Expected credit loss
Rm Gross carrying
amount before
credit write-off
and ECL
Stage 1 Stage 2 Stage 3 Net carrying
amount after
credit write-off
and ECL
September 2020 2 783 (68) (92) (50) 2 573
September 2019 3 016 (41) - - 2 975

Trade and other receivables

The Group applies the IFRS 9 simplified approach to measuring ECL which uses a lifetime expected loss model for all trade receivables. ECLs are calculated by using a provision matrix and applying a loss ratio to an age analysis of trade receivables and contracts, which have been aggregated into groupings that represent, to a large degree, how the Group manages its receivables and contract assets, major risk type and similarities in risk and this also illustrates the spread of credit risk at each reporting date. The loss ratio is calculated according to the ageing/payment profile of sales by applying historic write-offs to the payment profile of the sales population. Similarly, the sales population selected to determine the ageing/payment profile of the sales is representative of the entire population and in line with future payment expectations.

6. Impairment of goodwill and property, plant and equipment

Goodwill

Goodwill represents amounts arising on business combinations and is measured as the sum of the consideration transferred to the seller, plus the amount of any non-controlling interests recognised through the transaction, and the fair value of the Group's previously held equity interest in the acquiree, if any; less the net of the acquisition date fair value of the identifiable assets acquired (including any intangible assets) net of the fair value of any liabilities and contingent liabilities assumed.

Rm Reviewed
2020
Audited
2019
Carrying amount at the beginning of the year 999 1 053
Impairment of goodwill (75) (67)
Disposal of business  - (62)
Acquisition of businesses - 76
Exchange rate difference on consolidation of foreign subsidiaries - (1)
Carrying amount at the end of the year
924 999

 

Impact of COVID-19

The forecasts for this assessment were developed using consensus economic forecasts covering the period 2021 to 2023 which incorporated the impact of the COVID-19 pandemic on the South African economy, modified for our business units knowledge and understanding of expected customer requirements and their capacity to continue to transact.

The Group impaired the goodwill which arose on acquisition of two of its subsidiaries: African Cables (R61 million) and Dynateq International (R14 million) and R4 million of property, plant and equipment in Polybox. In 2019, the Group impaired goodwill which arose on acquisition of two of its subsidiaries: Metal Fabricators of Zambia Plc (Zamefa) (R57 million) and Polybox (R10 million) and R40 million of property, plant and equipment in Zamefa.

African Cables

African Cables delivered a subdued performance for the 2020 financial year, primarily due to the following:

Although the business has secured framework tenders at Eskom and various municipalities, the impact of the reprioritisation of Government's expenditure on infrastructure due to the impact of COVID-19 remains uncertain. Management is of the view that this business is likely to continue to experience pressure on volumes over the medium term and have therefore used forecasts taking this uncertainty into consideration.

Dynateq

Dynateq’s revenue is largely driven by securing contracts in the global defence sector. The business is dependent on the export market in various economies including the Middle East and Europe. Although a portion of the short-term order book is secured, management is of the view that this business is likely to experience pressure on volumes over the medium term.

The following information summarises the individual assumptions used to test for impairment of goodwill at a cash generating unit (CGU) level, using the value-in-use method.

          GROUP
Goodwill
Measurement
 currency
2020
Discount 
rate
(pre-tax)
%
2019
Discount
 rate
(pre-tax)
%
2020
Terminal 
growth
rate
%
2019
Terminal
growth
rate
%
2020
Rm
2019
Rm
Significant CGUs
EE
African Cables1  ZAR  22,1 21,3 4,0 4,0 - 61
ICT
Nashua Office Automation ZAR 20,3 18,0 4,0 4,0 203 203
Quince ZAR 11,4 22,2 4,0 4,0 124 124
ECN ZAR 20,6 17,8 4,0 4,0 140 140
SkyWire Technologies ZAR 18,9 22,3 4,0 3,0 170 170
AE
Omnigo ZAR 22,1 19,7 4,0 4,50 40 40
Terra Firma Solutions ZAR 21,0 19,4 4,0 4,0 88 88
Nanoteq ZAR 22,7 19,6 4,0 4,0 69 69
Dynateq1 ZAR 20,7 19,5 4,0 4,0                    -    14
Blue Nova Energy ZAR 22,6 19,9 4,0 3,0 53 53
887 962
Other2 ZAR  20,6 - 22,5   19,2 – 20,7  4,0 4,0 37 37
Net carrying amount           924 999
Gross goodwill carrying amount 1 066 1 066
Less: accumulated impairment loss (142) (67)
1 The recoverable amount is determined using the value-in-use approach. The recoverable amount is stated before the deduction of the carrying amount. The recoverable amount of African Cables and Dynateq are R856 million and R32 million respectively.
2 Due to the COVID-19 pandemic being an impairment indicator in the current year, impairment testing was performed over the Reutech
Communications entity as a CGU to ensure that the property, plant and equipment, intangible assets and right-of-use assets are appropriately
assessed for impairment. In the prior year, it was performed a lower CGU level to which the goodwill is allocated. Due to this separate
calculation Reutech comms was excluded from the aggregate balances.

The following additional assumptions were used in the impairment tests at 30 September 2020.

The basis for the value-in-use calculations is the management approved budget for 2021.

The discount rate used is calculated as the weighted average cost of the different components of capital, being debt and equity (WACC). This is consistent with international best practice and covers the different industries in which the Reunert group operates. The discount rate is then converted to pre-tax discount rate as required by IAS 36 using an appropriate methodology.

The terminal growth rate is calculated using the South African consumer price index (CPI) as a basis and thereafter adjusted for various risk factors. This is used to extrapolate the cash flow projections beyond the period covered of 5 years.

Under the economic conditions that have arisen during the pandemic, revenue growth is a key consideration. Accordingly, management has undertaken a sensitivity analysis of the consequence of a 5% reduction in revenue on the cash flow from forecasts.

The results of the sensitivity analysis were that additional impairments would be required for African Cables (R152 million), Skywire (R53 million), Reutech Radar (R32 million) and Blue Nova Energy (R2 million).

If the terminal growth rates were decreased by 1%, no impairment would be required.

If the discount rates were increased by 1%, no impairment would be required.

The forecasted cashflows used in the impairment models were determined based on assumptions made with regards to revenue growth. These include an assessment of the level of secured and unsecured orders, recurrence of existing revenue contracts and potential tenders to be applied for.

Investment in joint venture

The outlook for CBI Telecoms remains uncertain due to a limited order book and combined with significant margin degradation due to competition. Declining volumes contributed to weak cash flow forecasts over the short to medium term. These factors together with the substantial loss to date have resulted in the management of CBI Telecoms impairing the carrying amount of its property, plant and equipment, intangible assets and right-of-use assets by R147 million. The impact of the impairment is included in the equity-accounting earnings from joint ventures for the year at R42 million (after tax).

A discount rate of 17% and a terminal value of 4% was used in the value-in-use calculation.

7. Disposal of business

Sale of Pansolutions Holdings Proprietary Limited (Pansolutions)

With effect from 1 July 2020 Reunert ICT Holdings sold the Pansolutions shares it owned for R1.

Rm  Reviewed
2020
Net assets disposed in Pansolutions:
Leases and loans receivable 3
Inventory 20
Current and deferred tax 4
Trade and other receivables 12
Trade and other payables (20)
Long-term loans (2)
Short-term portion of long-term loans (1)
Net carrying amount of assets disposed of
16
Consideration received
(4)
Cash received on sale -
Less: cash on hand 4
Loss on disposal of subsidiary (net of tax of Rnil)
20

2019

Refer to 2019 Group audited annual financial statements.

Rm Reviewed
2020
Audited
2019

8. Number of shares used to calculate earnings per share1

Weighted average number of shares in issue, net of empowerment and treasury shares, for
basic earnings and headline earnings per share (millions of shares) 161 161
Adjusted by the dilutive effect of unexercised share options granted (millions of shares) 1 2
Weighted average number of shares for diluted basic and headline earnings per share (millions of shares) 162 163
1 The earnings used to determine earnings per share and diluted earnings per share is the profit for the year attributable to equity holders of Reunert of R47 million (2019: R790 million).

 

Rm Reviewed
2020
Audited
2019

9. Headline earnings

Profit for the year attributable to equity holders of Reunert  47 790
Headline earnings are determined by eliminating the effect of the following items from attributable earnings:
Goodwill impairment 75 67
Impairment of non-financial assets by a joint venture (after a tax credit of R14 million) 42 -
Loss on disposal of subsidiary 20 44
Impairment of property, plant and equipment (2019: after a tax credit of R6 million and NCI portion of R8 million) Net gain on disposal of assets 4 26
(after a tax charge of R1 million and NCI portion of R1 million) (2019: after a tax charge of R1 millionand NCI portion of Rnil) (2) (3)
Headline earnings 
186 924

10. Put Option Liability

As part of the Terra Firma acquisition in 2017, the Group granted put options in favour of the non-controlling shareholders for 25% of the issued share capital. The put option was exercised in the current year.
A reconciliation of the closing balance is as below:
Balance at the beginning of the year 120 120
Fair value remeasurements 3 (9)
Unwinding of discount 8 9
Settlement (131) -
Balance at the end of the year - 120
Less: current portion - (120)
Non-current portion - -

The majority of the put option for Terra Firma was settled in the current year resulting in the Group’s shareholding increasing from 62,49% to 89,94%.

The obligation was classified as a level 3 instrument in the fair value hierarchy.

The put obligation represented the fair value of the put option liability which was determined using a discounted cash flow valuation technique based on the multiples stipulated in the sale and purchase agreement. Significant unobservable inputs include:

Rm Reviewed
2020
Audited
2019

11. Contingent considerations

Reconciliation of carrying amount of contingent consideration financial liability
Balance at the beginning of the year 41 37
Raised at acquisition at fair value  - 24
Settlement (15)1 (16)
Fair value remeasurements (2)2 (4)
Balance at the end of the year3 24 41
1 During the current year the Oculus R12 million contingent consideration was settled in full and R3 million settlement was made in respect of DoppTech contingent consideration.
2 Arises on the remeasurement of the DoppTech purchase consideration.
3 The balance of the contingent consideration has been included in ‘Trade and other payables,’ on the statement of financial position.

These were classified as level 3 instruments in the fair value hierarchy.

Contingent considerations still in effect

DoppTech: the remaining contingent consideration for this business of R12 million is based on the achievement of specific key performance indicators as stipulated in the purchase agreement. R5 million of the contingent consideration has been settled in the current financial year, R3 million related to a cash settlement and R2 million to a fair value measurement.

Blue Nova Energy: a contingent consideration payable up to an amount of R12 million is based on the achievement of a future EBITDA target and key performance indicators stipulated within the purchase agreement. During the 2020 financial year the measurement period for the contingent consideration was extended by a further 12 months.

12. Change in Accounting Policy

IFRS 16 Leases

IFRS 16 specifies how leases will be recognised, measured, presented and disclosed. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases either as operating or finance leases, with IFRS 16’s approach to lessor accounting being substantially unchanged from its predecessor, IAS 17.

A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. The most significant impact for the Group of the adoption of the new standard has arisen from the various properties the Group leases and from its network site operating leases.

The Group has applied IFRS 16 using the modified retrospective approach and therefore comparative information has not been restated.

The Group reviewed contracts previously classified as leases under IAS 17 to determine whether the contract contains a lease on adoption date, and evaluated whether any significant contracts not previously accounted for as leases contained a lease under IFRS 16. The Group also reviewed whether any lease terms needed to be revised under IFRS 16.

The majority of leases to customers in the Group are contained in the ICT segment and are initiated through the Nashua channel. The franchise purchases the equipment from Nashua and this equipment is rented to the customer. A rental agreement is entered into with a customer (the lessee) to rent the equipment for a period of time and the contract is signed between the Nashua franchise or dealer and the customer.

The Group as a lessee

The Group assesses whether a contract is or contains a lease, at inception of the contract. Where there is a lease, the Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones), with a monetary threshold of R100 000 per asset. For short-term and low value leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

For most contracts there is limited judgement needed to determine whether an agreement contains a lease; however, where the Group has contracts for the use of Fiber and other fixed telecommunications lines, judgement has been applied to determine whether the Group controls the line and therefore has a lease.

The lease liability and right-of-use asset are initially measured at:

Judgements and assumptions made by management in applying the related accounting policies for IFRS 16:

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

The lease term is reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment, and that is within the control of the lessee.

Subsequently, the lease liability is measured on the amortised cost basis using an effective interest method and the interest expense is allocated over the lease term.

The right-of-use asset is subsequently measured at cost less accumulated depreciation and accumulated impairment losses, adjusted for remeasurements of the lease liability.

Depreciation is calculated on a straight-line basis over the lease term.

Right-of-use assets are assessed for impairments according to the impairment requirements of IAS 36. Right-of-use assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the statement of profit or loss for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use.

Lease modifications are defined as a change in the scope of a lease or the consideration for a lease, that was not part of the original terms and conditions of the lease. The Group differentiates between scenarios resulting in the remeasurement of existing lease assets and lease liabilities that are not lease modifications (for example, a change in lease term resulting from the exercise of an option to extend the lease when that option was not included in the original lease term) and those resulting in a lease modification (for example, a change in the lease term resulting from changes to the terms and conditions of the original lease).

The Group further distinguishes between those lease modifications that, in substance, represent the creation of a new lease that is separate from the original lease and those that, in substance, represent a change in the scope of, or the consideration paid for, the existing lease.

A lease modification is accounted for as a separate lease if the modification increases the scope of the lease by adding the right to use one or more underlying assets and the consideration paid for the lease increases by an amount commensurate with the stand alone price for the increase in scope. For lease modifications that do not result in a separate lease, the existing lease liability is remeasured using a discount rate determined at the effective date of the modification.

If the modification decreases the scope of a lease, the carrying amount of the right-of-use asset is decreased to reflect the partial or full termination of the lease, and a corresponding gain or loss is recognised in the statement of profit or loss. For all other lease modifications, a corresponding adjustment is made to the carrying amount of the right-of-use asset. The applicability of the lease modifications within the Group arises mainly in the ICT segment where terms of the rental contract are changed.

Practical expedients applied

In applying IFRS 16 for the first time and moving forward, the Group has and will continue to use the following practical expedients permitted by the standard:

Adjustment recognised on adoption of IFRS 16

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 October 2019. The rate applied is 10%.

For leases previously classified as finance leases the Group recognised the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right of use asset and the lease liability at the date of initial application.

Lease liabilities
Rm 1 October
2 019
Operating lease commitments disclosed as at 30 September 2019 (249)
Adjusted for changes in lease terms as at 1 October 2019 (26)
Adjusted operating lease commitments as at 1 October 2019 (275)
Impact of discounting using the lessee’s incremental borrowing rate at the date of initial application  44
(231)
Less: low-value leases recognised on a straight-line basis as an expense 2
Less: contracts reassessed as service agreements 7
Lease liability recognised as at 1 October 2019 (222)
Current lease liabilities  (64)
Non-current lease liabilities  (158)

Right-of-use assets

Right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 30 September 2019.

Rm 1 October
2 019
Properties 185
Plant 26
Motor vehicles 4
Total carrying amount of right-of-use assets 215

 

Rm 1 October
2019
  IFRS 16 
impact 
30 September
2019
The change in accounting policy affected the following items in the balance sheet on 1 October 2019: 
Right-of-use assets  215 215 -
Deferred tax assets*  143 - 143
Trade and other payables (2 177) 7 (2 184)
Lease liabilities (222) (222) -
Deferred tax liabilities* (138) - (138)
  (2 179) - (2 179)
* The recognition of the right-of-use assets gave rise to a R62 million deferred tax liability and the recognition of the lease liability gave rise to a R62 million deferred tax asset. There was no net impact on the Group’s deferred tax on 1 October 2019.

Lease liabilities
Rm Reviewed
2020
Reconciliation of lease liabilities as at 30 September 2020:
Balance at 1 October 2019 (2019: finance lease liabilities) 18
Lease liability recognised on initial adoption of IFRS16 222
Borrowings raised 44
Settlements (79)
Interest accrued 22
Termination of lease liability (5)
Remeasurement of lease liability (4)
Balance at 30 September 2020 218
Less: current portion (56)
Non-current portion 162

 

Rm Reviewed
2020
Audited
2019
Secured - at amortised cost
Lease liabilities (2019: finance lease liabilities) 218 18
Less: current portion (56) (3)
Total secured 162 15
Amounts payable under leases
Total minimum lease payments 257 22
< 1 year 71 4
1 - 5 years 181 18
> 5 years 5 -
Less: future finance charges (39) (4)
< 1 year (15) (1)
1 - 5 years (24) (3)
> 5 years                  -                                -  
Present value of minimum lease payments 218 18
< 1 year 56 3
1 - 5 years 157 15
> 5 years 5 -

The Group’s obligations under the lease liabilities (2019: finance lease liabilities) are secured by the lessor’s title to the leased assets.

The fair value of the lease liabilities is approximately equal to their carrying amounts because they have been determined by discounting the future cash flows of these liabilities back to present values using interest rates for equivalent duration instruments.

Right-of-use assets

The carrying amounts and depreciation of right-of-use assets are as follows as at 30 September 2020.

Rm Gross
Carrying
amount
Accumulated
Depreciation
Net
Carrying
Amount 
Properties 234 73 161
Plant 33 10 23
Motor Vehicles 4 2 2
271 85 186

13. Litigation

There is no material litigation being undertaken against or by the Group.

14. Events after reporting date

In November 2020, the Group introduced a strategic partner in the ICT segment’s 4th cluster and launched +Onex Solutions. +Onex Solutions is a cloud systems integrator targeting enterprise and mid-market segments with new age digital systems.

15. Going concern

Due to the COVID-19 pandemic, the Group focused on liquidity and cash flow preservation. Various measures that were implemented included cost optimisation and working capital initiatives.

The Group continues to have sufficient available banking facilities to support business activities as it recovers to more normal levels of trading in the short to medium term.

The directors have reviewed the Group’s financial position, existing credit facilities and available cash resources and are satisfied that the Group will continue as a going concern for at least the next 12 months from the date of this report.

16. External auditors review opinion

Deloitte & Touche has issued an unmodified review report on the reviewed condensed consolidated financial statements for the year ended 30 September 2020. The review was concluded in accordance with ISRE 2410 – Review of Interim Financial Information performed by the independent auditor of the entity. A copy of their unmodified review report is available for inspection at Reunert’s registered office. The auditor’s review report does not necessarily report on all information contained in this announcement. Investors are, therefore, advised that in order to obtain a full understanding of the nature of the auditor’s engagement, they should obtain a copy of that report from Reunert’s registered office. Any reference to future performance included in this announcement has not been reviewed or reported on by the auditors.