Notes FOR THE SIX MONTHS ENDED 31 MARCH 2020

1

Basis of preparation

 

This unaudited interim financial report has been prepared in accordance with and containing the information required by:

  • Framework concepts and the recognition and measurement requirements of International Financial Reporting Standards (IFRS) in effect for the Group at 1 October 2019
  • South African Institute of Chartered Accountants (SAICA) Financial Reporting Guides, as issued by the Accounting Practices Committee
  • Financial Reporting pronouncements as issued by the Financial Reporting Standards Council
  • Listings Requirements of the JSE Limited
  • Requirements of the Companies Act, 71 of 2008

This interim financial report has been prepared in accordance with and contains the minimum information required by IAS34 – Interim Financial Reporting.


This interim financial report was compiled under the supervision of NA Thomson CA(SA) (Chief Financial Officer).


The Group’s accounting policies applied for the period ended 31 March 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 14. These accounting policies comply with IFRS.

    Six months ended 31 March  
 
R million
2020 
(Unaudited)
2019 
(Unaudited)
Year ended 
30 September 
2019 
(Audited)

2.

Revenue

 
Revenue from contracts with customers:
 
Category of revenue
  Products 3 392 4 571 8 703
  Services 446 465 1 482
 
Timing of revenue recognition:
  Revenue recognised at a point in time 3 115 4 459 8 732
  Revenue recognised over time 723 577 1 453
 
Total revenue from contracts with customers
3 838 5 036 10 185
  Other revenue:
  Interest received on lease receivables 227 209 425
  Rental and other revenue 79 43 104
 
Total revenue
4 144 5 288 10 714
 

The EE segment earned the majority of its revenue in the sale of products and services categories.


The ICT segment earned revenue in each of the above categories.


The AE segment earned revenue in each category except for interest.


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


    Six months ended 31 March  
 
R million
2020 
(Unaudited)
2019 
(Unaudited)
Year ended 
30 September 
2019 
(Audited)

3

Operating profit

  Operating profit includes:
  -Cost of sales (excluding depreciation and amortisation) 2 696 3 653 7 399
  -Other expenses (excluding depreciation and amortisation) 979 963 1 873
  -Other income 22 26 80
  -Fair value gain on contingent consideration 2 - 4
  -Depreciation and amortisation* 119 83 165
  Included in other expenses above are:
  -Realised foreign exchange losses  (23) (11) (66)
  -Unrealised foreign exchange (losses)/gains  (67) 23 92
  -Impairment of non-derivative financial assets (trade receivables and finance leases and loans receivable) before considering the impact of COVID-19 22 - 22
  -Auditors' remuneration 13 14 27
  -Profit on disposal of property, plant and equipment 4 3 2
  * Depreciation and amortisation of property, plant and equipment and intangible assets considered to be part of cost
of sales is R22 million (March 2019: R30 million) (September 2019: R58 million).
    Depreciation and amortisation of property, plant and equipment and intangible assets allocated to other expenses
is R60 million (March 2019: R53 million) (September 2019: R107 million).
    Depreciation of right-of-use assets considered to be part of cost of sales is R4 million (March and September
2019: not applicable).
    Depreciation of right-of-use assets allocated to other expenses is R33 million (March and September 2019: not
applicable).
    Six months ended 31 March  
 
R million
2020 
(Unaudited)
2019 
(Unaudited)
Year ended 
30 September 
2019 
(Audited)

4

Net Interest expense

  Interest income  26 23 44
  Interest expense (28) (22) (50)
  Interest expense on lease liabilities (12) - -
  Interest on unwinding of put option liability (5) (5) (9)
 
Total
(19) (4) (15)

5

Number of shares and (loss)/earnings used to calculate (loss)/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) 161 161 161
  Adjusted by the dilutive effect of unexercised share options granted (millions of shares) 3 3 2
  Weighted average number of shares for diluted basic and headline
  earnings per share (millions of shares) 164 164 163
  1 The (loss)/earnings used to determine (loss)/earnings per share and diluted (loss)/earnings per share is the
(loss)/profit for the period attributable to equity holders of Reunert of (R277) million (March 2019: R366 million)
(September 2019: R790 million).
    Six months ended 31 March  
 
R million
2020 
(Unaudited)
2019 
(Unaudited)
Year ended 
30 September 
2019 
(Audited)

6

Headline (loss)/ earnings

 
Headline (loss)/ earnings
  (Loss)/profit attributable to equity holders of Reunert  (277) 366 790
  Headline (loss)/earnings are determined by eliminating the effect of the following items from attributable (loss)/earnings:
  Goodwill impairment 75 - 67
  Impairment of investment in a joint venture
  (after a tax credit of R13 million) 55 -
  Loss on remeasurement of subsidiary held fo sale 22 - -
  Impairment of property, plant and equipment
  (September 2019: after a tax credit of R6 million and NCI portion of R8 million) 4 - 26
  Loss on disposal of subsidiary - 44 44
  Net gain on disposal of assets(after a tax charge of R1 million and NCI portion of R1 million) (March 2019: after a tax charge of R1 million and NCI portion of Rnil) (September 2019: after a tax charge of R1 million and NCI portion of Rnil) (2) (2) (3)
  Headline (loss)/earnings  (123) 408 924
    Six months ended 31 March  
 
R million
2020 
(Unaudited)
2019 
(Unaudited)
Year ended 
30 September 
2019 
(Audited) 

7

Expected credit losses*

  Abnormal item -incurred credit loss 298 - -
  Expected credit losses 231 - -
529 - -
  * As a result of COVID-19 pandemic and the abnormal item (see commentary).
   
 
FINANCE LEASES AND LOANS RECEIVABLE

The gross finance leases receivable relates to the present value of discounted rental agreements entered into between Group-owned office automation franchises and customers, which are repayable over varying periods up to a maximum of five years from the date of the statement of financial position.


The loans receivable are loans to non-owned Office Automation franchises and dealers to fund rentals between the franchise and the customer. Ownership of the underlying rentals and equipment is transferred to Quince, however, as the franchise retains the credit risk through the recourse arrangements for accounting purposes, the overall arrangement is classified as a loan.


The Group applies the IFRS 9 general approach to measuring the expected credit loss (ECL) for finance leases and loans receivable. This is calculated by applying a loss ratio to the balance at each reporting date. Historically the loss ratio for the rentals and loans receivable was 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.

 

The forward looking information includes variables such as:

  • Gross domestic product (GDP) per capita
  • Government budget/GDP
  • Government debt/GDP
  • Current account/GDP
  • Unemployment rate
  • Inflation rate (CPI)
IMPACT OF COVID-19

Historical levels of credit impairment are not considered representative of what is expected in terms of future defaults due to the COVID-19 pandemic. The impact of the lockdown and the related significant reduction in economic activity and consequential predicted increase in business failures have made the estimation of future credit losses extremely complex. Accordingly, the Group undertook an extensive consultative process with various financial institutions and noted the following key and common themes.


Historical methods used in the past need to be substantially modified due to changes in the macro-economic conditions and the changing direction of relationships. 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 drop in interest rates over the last few months.


Financial institutions are experiencing very significant numbers of customer requests to restructure their payments or for credit holidays. This is in line with the information contained in the various SENS releases issued by some of the major banks in the past few weeks.


There is a general expectation that there may be a spike in defaults commencing in July 2020, after the three-month payment holidays, which started in April 2020, have come to an end.


Credit losses which rose by a factor of 2 post the 2008 financial crisis are expected to increase by a multiple of at least 4 under the consequences of COVID-19. Under COVID-19 a substantial amount of economic activity has ceased, the impact of which is predicted to result in a far more severe economic contraction and what is likely to be a longer and slower recovery compared to the financial crisis. This impact is predicted to be particularly severe for smaller and medium-sized enterprises, which comprise a material portion of Quince's rental book.


Security underpinning loans is likely to be less valuable and take longer to realise as more assets will become available into an environment of both weak demand and stretched balance sheets.


The Group has considered these factors above and also used the following key assumptions in estimating the ECL as at 31 March 2020:

Probability of default (PD) 1,5%
Loss given default (LGD) 63%
Exposure at default (EAD) Exposure of receivables at 31 March 2020

In estimating the PD the following estimates and judgements were applied

  • The Moody’s expected rate of credit defaults which has increased from 3,5% pre-COVID-19 to 11,5% post-COVID-19
  • This rate was tested for reasonableness and appropriateness with various financial institutions and credit rating agencies
  • The general consensus from the financial institutions and credit rating agencies we consulted, is that the expected rates of default have increased significantly and that the Moody’s estimate is within range
  • Due to the short period of time between the commencement of the economic impacts of COVID-19 and the date of interim reporting there are no historical data points and accordingly, the assessment is made through estimates which, by their nature, contain a high degree of uncertainty. Economists have forecasted different scenarios in terms of the extent and period of recovery over the short and medium term. These recoveries range from what is termed as V-shaped (best scenario), U-shaped (base scenario) and L-shaped (worst scenario). The Group has used the U-shaped scenario (base scenario) as its best estimate of the extent and period of recovery for its various operations and consequently for its customers

The PD estimate of 11,5% is further corroborated by the following:

  • Reserve Bank predictions of the COVID-19 impact on the economy
  • A Stats SA survey, which expects 10% of smaller businesses not to reopen post-lockdown
  • Economic forecasts of somewhere between a 10% to 12% decline in GDP in 2020, with a gradual U-shaped recovery thereafter
  • The level of job losses expected in the economy of circa 1,7 million jobs or more depending on the source (Investec, Reserve Bank forecasts)
  • Commentary by economists, who indicated that the low GDP growth in 2019 and the contraction in Q4:2019 and Q1:2020 had already stretched the cash flows of small businesses before COVID-19

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. As the pandemic has only impacted South Africa in the last three months, 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%.

 

The EAD was taken as being the exposure to the customer as reflected in the book as at the reporting date. This was because customers did not have the option to restructure their rental obligations, as no programme to provide relief to the customers was in place as at 31 March 2020, the reporting date.


In order to corroborate and support the results of applying the assumptions above, the Group performed a reasonableness test as follows:

 

The entire book was broken down into industry codes and the probability of loss per industry was ascribed to each grouping.

 

The input for this reasonableness test was:

  • Economic forecasts from banks and economists
  • The expected lockdown duration per industry sector under level 5 and 4 and the immediate impact this would have on affected businesses
  • A company by company evaluation of the top 100 customers
  • A risk framework analysis of the various customers within segments

The above analysis corroborated the expected credit loss impairment.


SIGNIFICANT INCREASE IN CREDIT RISK

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.


Carrying amounts by credit risk exposure
   
Expected credit loss
 
Rm
Gross
carrying
amount
Stage 1 Stage 2 Stage 3 Net carrying amount
 
March 2020
  Abnormal item* 298 - - (298) -
  Residual rental and loan book 2 878 (95) (149) (18) 2 616
  Carrying amount 3 176 (95) (149) (316) 2 616
 
March 2019
2 893 (44) - - 2 849
 
September 2019
3 016 (41) - - 2 975
  Total stages 1 to 3 ECLs required at March 2020 560
  Less: Pre-covid-19 ECL   (43)
             
  Post-covid-19 ECL in respect of rental and loans receivable under the general approach 517
  Post-covid-19 ECL in respect of trade receivables under the simplified approach 12
 
Expected credit loss
529
  * As noted in the commentary, an incurred credit loss arose from a fraud perpetrated against Quince Capital of
R298 million before taxation (R215 million after taxation). Further details have been outlined in the commentary.

8

IMPAIRMENT OF GOODWILL AND PROPERTY, PLANT AND EQUIPMENT

    Group Group Group
 
Rm
Mar-20 Mar-19 Sep-19
  Carrying amount at the beginning of the period 999 1 053 1 053
  Impairment of goodwill (75) - (67)
  Disposal of business  - (62) (62)
  Acquisition of businesses - - 76
  Exchange rate difference on consolidation of foreign subsidiaries - - (1)
  Carrying amount at the end of the period 924 991 999

 

 
IMPACT OF COVID-19
  The COVID-19 pandemic and the resulting national lockdown occurred before the closing of the interim half year reporting period. The nature and magnitude of this event and the likely impact this could have on the Group, provided an indicator of impairment that required all significant asset balances at 31 March 2020 to be tested for impairment in terms of IAS 36 Impairment of Assets. Our forecasts for this assessment were developed using consensus economic forecasts on 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.
   
 
IMPAIRMENT OF GOODWILL AND PROPERTY, PLANT AND EQUIPMENT
  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.

 

8.1
GOODWILL
African Cables

African Cables continued to deliver a subdued performance for the first half of the 2020 financial year, primarily due to the following:

  • The low level of demand for power cable
  • Weak level of investment by Government into infrastructure
  • A seven-week labour disruption at African Cables during October and November 2019 which negatively impacted revenue and profitability
  • Loss of the two weeks of March’s sales due to COVID-19 and the resulting lockdown and preparation for closure of the factory

Although the outlook remains positive beyond 2020 due to the securing of framework tenders at Eskom and various municipalities, the reprioritisation of Government spend on infrastructure due to the impact of COVID-19 remains uncertain. Management is of the view that this business is likely to experience pressure on its volumes over the medium term and have therefore used forecasts taking into consideration this uncertainty.


Dynateq

Dynateq’s revenue is largely driven by securing contracts within the global defence sector. The business is dependent on the export market in various economies including the Middle East and Europe. In addition, there is a high dependency on component parts from the upstream supply chain which makes revenue and production forecasts uncertain in the short to medium term. 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 based on the extent of recovery of the global defence market in which Dynateq’s products are sold.


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
Measurement
currency
Discount
rate
(pre-tax)
%
Terminal
growth
rate
%
March
2020
Rm
September
2019
Rm
             
 
Significant CGUs
 
EE
  African Cables ZAR  20,57 4,0  - 61,0
  Zamefa ZMW  32,91 4,0  - -
 
ICT
  Nashua Office Automation ZAR   20,30 4,00  203 203
  Quince ZAR   11,35 4,00  124 124
  ECN ZAR   20,57 4,00  140 140
  SkyWire Technologies ZAR   18,85 4,00  170 170
 
AE
  Omnigo ZAR   22,09 4,00  40 40
  Terra Firma Solutions ZAR   21,03 4,00  88 88
  Nanoteq ZAR   22,71 4,00  69 69
  Dynateq ZAR   20,70 4,00  - 14
  Blue Nova Energy   ZAR   22,61  4,00  53 53
 887 962
  Other 1   ZAR    18,85-22,71   4,00  37 37
  Net carrying amount  924 999
 
  Gross goodwill carrying amount        1 066 1 066
  Less: accumulated impairment loss       (142) (67)
  1 This consists of the aggregate of individual immaterial goodwill balances across all segments above.

 

The following additional assumptions were used in the impairment tests at 31 March 2020.


The basis for the value-in-use calculations are the management-approved forecasts for 2020 and 2021 prepared specifically for this assessment incorporating management's best estimate of the likely impact of the economic downturn resulting from the COVID-19 pandemic. Management was guided in its forecasts by the views of leading South African economists.


he discount rate used is calculated as the weighted average cost of the different components of capital, being debt and equity (WACC) taking into consideration the latest available market information relating to risk free rates and market equity premiums.

 

This is consistent with international best practice and covers the different industries in which the Reunert Group operates.


The terminal growth rate is in line with the long-term nominal GDP and thereafter adjusted for various risk factors.


This is used to extrapolate the cash flow projections beyond the period covered of five years. Terminal growth rate of 4% has been applied across all the entities.

 

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 achieved.


The results of the sensitivity analysis were that no impairment would be required except in the case of Skywire (R43 million), Reutech Radar (R54 million), Reutech Communications (R27 million), Nanoteq (R7 million), and Nashua Communications (R31 million). If the terminal growth rates were decreased by 1%, no impairment would be required.


If the discount rates were decreased by 1%, no impairment will be required except for Reutech Radar (R9 million).


8.2
INVESTMENT IN JOINT VENTURE

The outlook for CBI Telecoms remains uncertain, with an unsecured order book, significant margin degradation and declining volumes all contributing 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 by R135 million. The impact of the impairment is included in equity-accounted earnings from joint ventures for the period to 31 March 2020 at R55 million (after tax). A discount rate of 17% and a terminal value of 4% was used in the value-in-use calculation.

    Six months ended 31 March  
 
R million
2020 
(Unaudited)
2019 
(Unaudited)
Year ended 
30 September 
2019 
(Audited)

9

Loss on remeasurement of subsidiary held fo sale

  Remeasurement loss on recognising a subsidiary's net assets at fair value less costs to sell (22) - -
  PanSolutions Holdings Proprietary Limited has met the requirements to be classified as a disposal group in terms of IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations. The carrying amount of the subsidiary, after the remeasurement of subsidiary held for sale, is Rnil.
    Six months ended 31 March  
 
R million
2020 
(Unaudited)
2019 
(Unaudited)
Year ended 
30 September 
2019 
(Audited) 

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 Terra Firma put option is exercisable between 2019 and 2023.
  A reconciliation of the closing balance is as below:
  Balance at the beginning of the period 120  120 120
  Fair value remeasurements - - (9)
  Unwinding of discount  5  5                                9
  Balance at the end of the period 125  125 120
  Less: current portion  (125)  -                           (120)
  Non-current portion -  125 -

 

 

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

 

The Terra Firma obligation represents the fair value of the put option liability which has been determined using a discounted cash flow valuation technique based on the multiples stipulated in the sales and purchase agreement. Significant unobservable inputs include:

  • The 2020 forecast revenue and net profit after tax (NPAT) have been used. These forecasts are based on management’s best estimate of the revenue and NPAT likely to be achieved in 2020
  • The earnings multiples are as stipulated in the sales and purchase agreement
  • The discount rate applied was 8,0%, being the average cost of borrowing

If the key unobservable inputs to the valuation model being estimated were 1% higher/lower while all the other variables were held constant, the carrying amount of the put option liability would decrease/increase by R1 million respectively.

    Six months ended 31 March  
 
R million
2020 
(Unaudited)
2019 
(Unaudited)
Year ended 
30 September 
2019 
(Audited)

11

Long-term loans

  Total long-term loans (including finance leases)  40 67 60
  Less: current portion (including finance leases) - (1) (3)
  Non-current long-term loans 40 66 57

  Counterparty
R million
Relationship Sales Purchases Lease Payments Treasury shares Amount owed to related parties Dividends Received

12

Related-party transactions

  March 2020
  CBI-Electric Telecom Cables Proprietary Limited Joint venture 1 - - - - -
  Oxirostax Proprietary Limited (Nashua Winelands) Associate 1 1 - - - -
  Bargenel Investments Proprietary Limited Empowerment partner owning 18,5m Reunert shares - - - 276 - -
  Lexshell 661 Investment Proprietary Limited Joint venture - - 6 - - 3
  March 2019
  CBI-Electric Telecom Cables Proprietary Limited Joint venture 1 30 - - 7 -
  Oxirostax Proprietary Limited (Nashua Winelands) Associate 8 - - - 1 -
  Bargenel Investments Proprietary Limited Empowerment partner owning 18,5m Reunert shares - - - 276 - -
  Lexshell 661 Investment Proprietary Limited Joint venture - - 5 - 7 -
  September 2019
  CBI-Electric Telecom Cables Proprietary Limited Joint venture - 74 - - 29 -
  Oxirostax Proprietary Limited (Nashua Winelands) Associate 20 2 - - - -
  Bargenel Investments Proprietary Limited Empowerment partner owning 18,5m Reunert shares - - - 276 - -
  Lexshell 661 Investment Proprietary Limited Joint venture - - 4 - 4 3

    Six months ended 31 March  
 
R million
2020 
(Unaudited)
2019 
(Unaudited)
Year ended 
30 September 
2019 
(Audited)

13

Contingent considerations

  Balance at the beginning of the period 41 37 37
  Raised at acquisition at fair value  - - 24
  Settlement of contingent consideration (3) - (16)
  Remeasurements (2) (2) (4)
  Balance at the end of the period1 36 35 41
  1 The balance of the contingent consideration has been included in ‘Trade and other payables, provisions and taxation’
on the statement of financial position.

 

These were classified as level 3 instruments in the fair value hierarchy based on the following unobservable inputs:


Contingent considerations still in effect

Dopptech: the remaining contingent consideration of R12 million is stipulated within the purchase agreement based on the achievement of specific key performance indicators.


BNE: a contingent consideration payable up to an amount of R12 million is based on the achievement of a future EBITDA and key performance indicators stipulated within the purchase agreement. The fair value at acquisition was R12 million and is based on management's best estimate of the most likely outcome of the achievement of future key performance indicators.


OculusIP: a contingent consideration payable up to an amount of R12 million is based on an annuity gross profit for wireless line and voice rentals over a 12-month period from acquisition. The fair value at acquisition was R12 million and is based on management's best estimate of the most likely outcome of the achievement of annuity gross profit for line and voice rentals.

14

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 as operating or finance, with IFRS 16’s approach to lessor accounting being substantially unchanged from its predecessor, IAS 17.


Accordingly, lessee accounting for finance leases is similar under IFRS 16 to that under the previous standard IAS 17. Lessor accounting under IFRS 16 is also similar to IAS 17.


The Group has applied IFRS 16 using the cumulative catch-up approach and therefore comparative information has not been restated.

 

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 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. 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 fibre 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:

  • The present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group applies its incremental borrowing rate; and
  • Any initial direct costs incurred
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).


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.

 

Practical expedients applied

In applying IFRS 16 for the first time, the group has used the following practical expedients permitted by the standard:

  • The use of a single discount rate to a portfolio of leases with reasonably similar characteristics
  • Reliance on previous assessments on whether leases are onerous
  • The accounting for operating leases with a remaining lease term of less than 12 months as at 1 October 2019 as short-term leases
  • The accounting for operating leases of low-value assets (asset with a cost of R100 000 or lower) when new on 1 October 2019
  • The use of current knowledge and plans to determine the lease term where the contract contains options to extend or terminate the lease
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 interest rate implicit in the lease, and if this rate cannot be readily determined, lessee’s incremental borrowing rate as of 1 October 2019. The weighted-average 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.


  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 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 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.
31 March
2020
1 October
2019
  Properties 173 185
  Plant 24 26
  Motor vehicles 3 4
  Total carrying amount of right-of-use assets 200 215
 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, provisions and taxation (2 177) 7 (2 184)
  Lease liabilities (222) (222) -
  Deferred tax liabilities* (138) - (138)
(2 179) -  (2 179)
  * The raising of the right-of-use assets gave rise to a R62 million deferred tax liability and the raising of the lease liability gave rise to a R62 million deferred tax asset. Since this had no net effect in each group company that raised IFRS 16 leases, there was no net impact on the Group’s deferred tax assets and liabilities on 1 October 2019.

15

Litigation

There is no material litigation being undertaken against or by the Group. The Group has made adequate provision against any cases where the Group considers there are reasonable prospects for the litigation to succeed. The Group has adequate resources and good grounds to defend any litigation it is aware of.

16

Events after reporting date

No events have occurred after the reporting date that require additional disclosure or adjustment to the results presented.

17

Going concern

As a result of the COVID-19 pandemic, the Group's focus is to preserve liquidity and cash flow. It has accordingly implemented various cost saving measures. 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.