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BASIS OF ACCOUNTING AND REPORTING
The financial statements as set out on pages 64 to 105 have been prepared on the historical cost basis except for certain financial instruments that are fairly valued by marking-to-market. Significant details of the Group’s accounting policies are set out below which are consistent with those applied in the previous year, except for the adoption of IFRS 2 Share-Based Payments on 1 March 2005. In accordance with the transition provisions, IFRS 2 has been applied to all grants after 7 November 2002 and that were unvested as of 1 March 2005. The Group has also applied the requirements of IFRS 5 Discontinuing Operations. Comparative figures in respect of 2005 have been restated to reflect these adjustments, which are the only two that have a material impact on the Group’s results. The impact of the adoption of IFRS 2 on basic EPS amounts to 2,44 cents (2005: 0,3 cents) and on diluted EPS amounts to 2,38 cents (2005: 0,4 cents).
The financial statements comply with the International Financial Reporting Standards (“IFRS”) of the International Accounting Standards Board, the JSE’s Listings Requirements and the Companies Act of South Africa.
BASIS OF CONSOLIDATION
The Group reports in US Dollars in order to be consistent with the economic substance of the underlying events and circumstances of the Group’s businesses. The US Dollar is the functional currency in which the major part of the Group’s trading is conducted. Reporting in US Dollars reduces the distorting effects of changes in currency exchange rates, simplifies financial analysis and enhances the transparency of the financial results. Presenting financial information in US Dollars is also more meaningful to global investors and for international benchmarking.
The translation for reporting purposes into US Dollars is done as follows:
- assets and liabilities (including comparatives) are translated at the closing rate ruling at the date of each balance sheet; and
- income and expense items for all periods presented (including comparatives) are translated at an average rate that approximates the ruling exchange rates at the dates of the transactions.
The consolidated Group financial statements incorporate the financial statements of the Company and all enterprises controlled by the Company up to 28 February each year. Control is achieved where the Group has the power to govern the financial and operating policies of an enterprise so as to obtain economic benefits from its activities.
The operating results of these entities have been included from the effective dates of acquisition to the effective dates of disposal. All significant inter-company transactions and balances have been eliminated.
On acquisition, the assets and liabilities of a subsidiary are measured at their fair values at the date of acquisition. To the extent that the cost of the acquisition, in excess of the fair value of the net assets acquired, is attributable to intangible assets that the entity holds for its own use or for rental to others, this value is recognised as an intangible asset. Any additional difference between the cost of acquisition and total net asset value of the entity is recognised as goodwill. The interest of minority shareholders is stated at the minority’s proportion of the fair values of the assets and liabilities recognised.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with those of the Group.
FOREIGN CURRENCY TRANSACTIONS
Transactions in currencies other than the reporting currency are initially recorded at the rates of exchange ruling on the dates of the transactions. At each balance sheet date, monetary assets and liabilities denominated in such currencies are retranslated at the rates prevailing on the balance sheet date. Profits and losses arising on exchange are dealt with in the income statement except for profits and losses on exchange arising from equity loans which are taken directly to equity, until the entity to which the loan was made has been disposed of, at which time they are recognised as income or expenses.
Exchange differences arising on equity loans and the translation of foreign subsidiaries are classified as equity and transferred to the Group's translation reserve. Such translation differences are recognised as income or expenses in the period during which disposals are effected.
Where appropriate, in order to minimise its exposure to foreign exchange risks, the Group enters into forward exchange contracts.
PROPERTY, PLANT AND EQUIPMENT
Land and buildings comprise mainly warehouses and offices. All property, plant and equipment have been stated at cost less accumulated depreciation and impairment except land, which is shown at cost less impairment. Depreciation is calculated based on cost using the straightline method over the estimated useful lives of the assets and their recoverable amount.
The basis of depreciation provided on property, plant and equipment is as follows:
Useful lives (years)
Office furniture and equipment 2 – 6
Motor vehicles 2 – 4
Computer equipment and software 2 – 6
Buildings 20
Leasehold improvements Period of the lease Land is not depreciated.
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.
Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the income statement.
LEASED ASSETS
Assets leased in terms of agreements, which are considered to be finance leases, are capitalised. Capitalised leased assets are depreciated at the same rate and on the same basis as equivalent owned assets or over the term of the lease if this is shorter. The liability to the lessor is included in the balance sheet as a finance lease obligation. Lease finance charges are amortised over the duration of the leases, using the effective interest rate method.
Operating leases, mainly for the rental of premises, office furniture, computer equipment and motor vehicles are not capitalised and rentals are expensed on a straight-line basis over the lease term.
CAPITALISED DEVELOPMENT EXPENDITURE
An intangible asset arising from internal development (or from the development phase of an internal project) is recognised only if the Group can demonstrate all of the following:
(a) the technical feasibility of completing the intangible asset so that it will be vailable for use or sale;
(b) its intention or ability to complete the intangible asset, and use or sell it;
(c) how the intangible asset will generate probable future economic benefits, including the existence of a market for the output of the ntangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;
(d) the availability of adequate technical, financial and other resources to complete the development, and to use or sell the intangible sset; and
(e) its ability to reliably measure the expenditure attributable to the intangible asset during its development.
Capitalised development costs are amortised using the straight-line method over their useful lives, which generally do not exceed seven years.
OTHER INTANGIBLE ASSETS
Intangible assets are identifiable non-monetary assets without physical substance that an entity holds for its own use or for rental to others and include technology-based items like patents, copyrights and databases; customer based items, research and development and contractbased items.
An intangible asset is recognised when it meets the following criteria:
(a) is identifiable;
(b) the entity has control over the asset;
(c) it is probable that economic benefits will flow to the entity; and
(d) the cost of the asset can be measured reliably.
Intangible assets are amortised using the straight-line method over their useful lives, which generally do not exceed seven years.
GOODWILL
Goodwill represents the excess cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. In omputing the gains and losses on the disposal of an entity, or part thereof, included is the carrying amount of goodwill relating to the entity or part thereof.
Impairment tests are conducted annually on goodwill based on discounted cash flows.
IMPAIRMENT
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any ndication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, its carrying amount is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately and are reflected in the income statement.
Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but will never exceed the carrying amount that would have been determined had no impairment loss been recognised in prior years. A reversal of an impairment loss is recognised immediately in the income statement.
INVENTORIES
Inventories, comprising merchandise for resale and raw materials, are stated at the lower of cost and net realisable value and are mainly valued on the average cost basis.
Provision is made for obsolete and slow-moving inventory.
Contract work in progress is recognised on the percentage of completion method by reference to the milestones for each contract.
FINANCIAL INSTRUMENTS
Measurement
Financial instruments are initially measured at cost, which includes transaction costs and approximates fair value. Subsequent to initial recognition these instruments are measured at amortised cost using the effective interest rate method.
Investments
Investments, other than investments in subsidiaries, are recognised on a trade-date basis and are initially measured at cost, including transaction costs. These investments are classified as either held-for-trading or available-for-sale, and are measured at subsequent reporting dates at fair value.
Where securities are held for trading purposes, gains or losses arising from changes in fair value are included in the income statement for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the income statement for the period.
Fair value of listed investments is calculated by reference to the quoted selling price at the close of business on the balance sheet date. Unlisted investments are shown at fair value or at cost where fair value cannot be reliably measured.
Trade receivables
Trade receivables are recognised initially at cost, which approximates fair value and are subsequently measured at amortised cost using the effective interest rate method. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all the amounts due according to the original terms of the receivables.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
Borrowings
Borrowings are initially recorded at fair value, net of direct issue costs, and are subsequently measured at amortised cost using the effective interest rate method. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.
Trade payables
Trade payables are recognised initially at cost, which approximates fair value and are subsequently measured at amortised cost using the effective interest rate method.
PROVISIONS
Provisions are 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 economic benefits will be required to settle the obligation, and a reliable estimate can be made for the amount of the
obligation. Non-current provisions are adjusted to reflect the time value of money.
AMOUNTS OWING TO VENDORS
Amounts owing to vendors represent purchase considerations owing in respect of acquisitions. These purchase considerations are to be settled with the vendors in cash or shares on fulfilment of the relevant profit warranties. The amounts owing are interest free and will be settled within the next year. Any additional amounts payable to vendors will be allocated to goodwill arising on acquisition and will have no effect on the income statement.
TAXATION
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable income for the year. Taxable income differs from net income as reported in the income statement because it includes items of income or expense that are taxable or deductible in other periods and it further excludes items that are never taxable or deductible. The Group’s liability for current tax uses relevant rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences which arise from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable income. In principle, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable income will be available against which deductible temporary differences can be utilised. The carrying value of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.
REVENUE RECOGNITION
Revenue is measured at fair value of the consideration received or receivable and represents the invoiced value of sales and services rendered, excluding discounts and sales related taxes. In respect of trading operations revenue is recognised at the date on which goods are delivered to customers or services are provided.
Revenue and profits from long-term and fixed-price contracts are recognised on the percentage of completion method, after providing for contingencies and once the outcome of the contract can be assessed with reasonable assurance. The percentage of completion is measured by reference to milestones set out in each contract. As soon as losses on individual contracts become evident, they are provided for in full.
Revenue from cost plus contracts is recognised by reference to the recoverable costs incurred during the period plus the fee earned, measured by the proportion that costs incurred to date bear to the estimated total costs of the contract.
Within the Group, inter-company and inter-divisional revenue are eliminated on consolidation.
SHARE-BASED PAYMENTS
The Group has applied the requirements of IFRS 2 Share-Based Payments. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested at 1 March 2005 and to liabilities for share-based transactions existing at 1 March 2005.
The Group issues equity-settled and cash-settled share-based incentives to certain employees.
Equity-settled share-based payments are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non-market based vesting conditions.
For cash-settled share-based payments the liability for the fair value of all unexercised share rights which are expected to vest, is determined on the reporting date and amortised over the applicable period.
Fair value is measured by use of a binomial model for the equity-settled share-based payments and by use of a Black-Scholes-Merton model for cash-settled share-based payments. The expected life used in the models has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
PENSION SCHEME ARRANGEMENTS
Certain subsidiaries of the Group make contributions to various defined contribution retirement plans on behalf of employees, in accordance with the local practice in the country of operation. These contributions are charged against income as incurred.
The Group has no liability to these defined contribution retirement plans other than the payment of its share of the contribution in terms of the agreement with the funds and employees concerned, which differs from country to country.
DISCONTINUING OPERATIONS
Discontinuing operations are significant, distinguishable components of the Group that have been sold, abandoned or are the subject of formal plans for disposal or discontinuance. Any operation disposed of subsequent to year-end is considered to be a discontinuing operation
for disclosure purposes.
Once an operation has been identified as discontinuing, comparative information is restated.
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