10. Non-financial instruments
10.5

Change in accounting policy
10.5.1

IFRS 15 – Revenue from Contracts with Customers

IFRS 15 replaces both IAS 11 and IAS 18 as well as SIC 31, IFRIC 13, IFRIC 15 and IFRIC 18 and establishes a comprehensive framework for recognition of revenue from contracts with customers. Revenue is recognised when a customer obtains control of the goods or services. Determining the timing of the transfer of control – at a point in time or over time – requires a certain level of judgement.

On application of IFRS 15, the following material changes and considerations have been made:

Revenue category   Nature of material considerations and changes in accounting policy
Prepaid and postpaid SIM cards   The Group earns activation and ongoing revenue on starter packs that have been distributed to prepaid customers. Under IFRS 15, the recognition of ongoing revenue requires a certain level of judgement (refer to critical accounting judgements and assumptions below) and the Group has concluded that the treatment remains unchanged as under the previous standards. However, the initial sale of starter packs is now deemed to have a financing element under IFRS 15. As such, less revenue is recognised at the point of sale of starter packs taking into account the time value of money. The unwinding of the corresponding trade receivables balance is recognised in revenue, resulting in a reduction of net profit after tax of R10.1 million.
Sale of handsets, tablets and other devices   Revenue relating to the sale of handsets under certain contracts that were previously recognised as principal are now accounted for as agent. This is due to the change in considerations for the recognition of principal versus agent under IFRS 15, specifically the removal of the principal indicator that the Group bears credit risk for the amount receivable from the customer. The Group has applied its judgement when considering the remaining indicators and determined that it acts as an agent in these specific contracts. In general, however, the sale of handsets, tablets and devices remain as principal under IFRS 15 as they were historically under IAS 18. The effect of this change due to IFRS 15 on the current year Group statement of comprehensive income is only a reclassification between revenue and changes in inventories of finished goods to the value of R1.3 billion. The gross profit effect of this change is nil.
Contract revenue (included in share of losses from Cell C)   Cell C’s incremental cost of obtaining a contract with a customer, previously expensed under IAS 18, is recognised as an asset under IFRS 15. The effect on the share of losses in the current period as a result of this change in accounting policy is offset by the impairment of the investment in Cell C to zero. The resulting effect on net profit after tax is immaterial.
Revenue category   Critical accounting judgements and assumptions
Prepaid and postpaid SIM cards – ongoing revenue  

The Group earns ongoing revenue on starter packs that have been distributed to prepaid customers. The Group is entitled to ongoing revenue on all future prepaid airtime purchases that a signed-up prepaid customer makes, even if the subscriber does not top up at that Group in the future.

Ongoing revenue earned is variable in nature as the Group’s entitlement to these amounts is dependent on the future spending patterns of the prepaid customers, and therefore contingent on a future event occurring or not occurring. IFRS 15 requires an entity to estimate the amount of variable consideration it will be entitled to for the contracts it has entered into with its customers and include this in the transaction price at contract inception, to the extent the variable consideration is not constrained.

The Group has concluded that the ongoing revenue is fully constrained at the individual contract level due to the high variability in behaviour of the individual customers, including:

  • the period over which prepaid customers remain on the same SIM card (this can range from one day to a number of years); and
  • the spending patterns of individual customers, which is also highly variable.

In addition, because the terms of the ongoing revenue structure with the telecommunication companies are regularly up for negotiation, the Group is not able to predict the likelihood or magnitude of a revenue reversal.

The Group’s policy is therefore only to recognise the variable consideration as revenue as and when it is received because it is only at this point that it is highly probable that a significant reversal in revenue for that contract will not occur in the future.

IFRS 15 transition

The Group has applied IFRS 15 – Revenue from Contracts with Customers using the modified retrospective approach by recognising the cumulative effect of initially applying IFRS 15 as an adjustment to the opening balance of equity at 1 June 2018. Therefore the comparative information on the Group statement of financial position and Group statement of comprehensive income has not been restated for the adoption of this new standard and continues to be reported under the previously applied standards.

In accordance with the requirements of applying the modified retrospective approach under IFRS 15, the current financial information has been presented below with adjustments to indicate the Group results had IFRS 15 not been adopted.

Group income statement
For the year ended 31 May 2019		 2019
under
previously
applied
standards
R’000		   IFRS 15
adjustments
R’000		   2019
R’000		  
Revenue  27 157 300     (1 287 867)    25 869 433    
Other income  120 914     —     120 914    
Changes in inventories of finished goods  (24 342 726)    1 304 825     (23 037 901)   
Finance costs incurred in the generation of revenue  (185 411)    —     (185 411)   
Employee compensation and benefit expense  (594 183)    —     (594 183)   
Depreciation, amortisation and other impairment charges  (253 016)    —     (253 016)   
Impairment and fair value losses on financial assets  (1 212 089)    —     (1 212 089)   
Other expenses  (499 174)    1 091     (498 083)   
Operating profit  191 615     18 049     209 664    
Finance costs  (247 115)    1 158     (245 957)   
Finance income  102 877     (3 172)    99 705    
Impairments on associates and joint venture  (2 436 468)    (232 608)    (2 669 076)   
Share of losses from associates and joint ventures  (3 886 638)    185 228     (3 701 410)   
Loss before taxation  (6 275 729)    (31 345)    (6 307 074)   
Taxation  (310 632)    (4 490)    (315 122)   
(Loss)/profit for the year  (6 586 361)    (35 835)    (6 622 196)   
(Loss)/profit for the year attributable to:                   
Equity holders of the parent  (6 610 548)    (35 835)    (6 646 383)   
Non-controlling interest                   
Earnings per share for loss attributable to:                   
Equity holders (cents) 24 187     —     24 187    
– Basic  (123.07)    (0.04)    (123.03)   
– Diluted1                 

1 There are no dilutive instruments in the current year.

Group statement of financial position
As at		 31 May 2019
under
previously
applied
standards
R’000		   IFRS 15
adjustments
R’000		   31 May
2019
R’000		  
ASSETS            
Non-current assets  3 475 242     1 828     3 477 070    
Property, plant and equipment  237 657     —     237 657    
Intangible assets  1 083 328     —     1 083 328    
Goodwill  1 234 995     —     1 234 995    
Investments in and loans to associates and joint ventures  218 842     —     218 842    
Investments in and loans to venture capital associates and joint ventures  —     —     —    
Loans receivable  41 760     —     41 760    
Starter pack assets  —     —     —    
Trade and other receivables  —     —     —    
Advances to customers  584 440     —     584 440    
Deferred taxation assets  74 220     1 828     76 048    
Current assets  8 643 895     (39 593)    8 604 302    
Starter pack assets  —     —     —    
Loans to associate  —     —     —    
Inventories  1 514 649     —     1 514 649    
Loans receivable  190 769     —     190 769    
Trade and other receivables  4 296 859     (39 593)    4 257 266    
Advances to customers  1 032 657     —     1 032 657    
Financial asset at fair value through profit and loss  204 739     —     204 739    
Current tax assets  18 626     —     18 626    
Cash and cash equivalents  1 385 596     —     1 385 596    
Total assets  12 119 137     (37 765)    12 081 372    
EQUITY AND LIABILITIES                   
Capital and reserves  2 517 679     (26 117)    2 491 562    
Issued share capital and premium  7 599 016     —     7 599 016    
Other reserves  (2 824 740)    —     (2 824 740)   
Retained earnings  (2 378 914)    (26 117)    (2 405 031)   
Total ordinary shareholders’ equity  2 395 362     (26 117)    2 369 245    
Non-controlling interest  122 317     —     122 317    
Non-current liabilities  1 960 248     (8 328)    1 951 920    
Deferred taxation liabilities  244 728     (8 328)    236 400    
Borrowings  1 715 520     —     1 715 520    
Current liabilities  7 641 210     (3 320)    7 637 890    
Trade and other payables  5 374 706     (3 320)    5 371 386    
Financial guarantee contracts  243 492     —     243 492    
Provisions  24 947     —     24 947    
Financial liabilities at fair value through profit and loss  460 354     —     460 354    
Current tax liabilities  9 104     —     9 104    
Borrowings  1 520 764     —     1 520 764    
Bank overdraft  7 843     —     7 843    
Total equity and liabilities  12 119 137     (37 765)    12 081 372    

 

  IFRS 15 
adjustments 
R’000 		  
Adjustments to retained earnings    
Retained earnings as at 1 June 2018 (9 717)  
Profit for the year attributable to equity holders of the parent 35 835   
Retained earnings as at 31 May 2019 26 118   
10.5.2

IFRS 9 – Financial Instruments

IFIFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 – Financial Instruments: Recognition and Measurement.

Classification and measurement of financial assets

The adoption of IFRS 9 has not had a material impact on the Group’s accounting policies related to the classification and measurement of financial assets, financial liabilities and derivative financial instruments. The following table demonstrates the measurement category of financial instruments under IAS 39 and IFRS 9:

  IAS 39 IFRS 9  
Trade and other receivables* Loans and receivables Amortised cost  
Cash and cash equivalents Loans and receivables Amortised cost  
Loans to associates and joint ventures Loans and receivables Amortised cost  
Loans receivable Loans and receivables Amortised cost  
Advances to customers Loans and receivables Amortised cost  
Financial assets at fair value through profit and loss Fair value through profit and loss Fair value through profit and loss  
Interest-bearing borrowings Amortised cost Amortised cost  
Non-interest-bearing borrowings Amortised cost Amortised cost  
Trade and other payables Amortised cost Amortised cost  
Put option liability Fair value through profit and loss Fair value through profit and loss  
Contingent consideration Amortised cost Amortised cost  
Financial guarantee contracts Not applicable Amortised cost  
Bank overdraft Amortised cost Amortised cost  
Financial liabilities at fair value through profit and loss Fair value through profit and loss Fair value through profit and loss  

Impairment of financial assets

IFRS 9 replaces the “incurred loss” model in IAS 39 with an “expected credit loss” (ECL) model. The Group has four types of financial assets that are subject to the new ECL model:

  • trade receivables
  • loans receivable and loans to associates and joint ventures
  • guarantees
  • cash and cash equivalents (immaterial impairment loss identified)

The Group was required to revise its impairment methodology under IFRS 9 for each of these classes of assets. The impact of the change in impairment methodology on the Group’s retained earnings is disclosed below.

Trade receivables

The Group applies the IFRS 9 simplified approach to measuring ECL which uses a lifetime expected loss allowance for all trade receivables. ECLs are calculated by applying a loss ratio to the aged balance of trade receivables at each reporting date. The loss ratio is calculated according to the ageing/payment profile of sales by applying historic/proxy write-offs to the payment profile of the sales population. Trade receivable balances have been grouped so that the ECL calculation is performed on groups of receivables with similar risk characteristics and ability to pay. 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. The historic loss ratio is then adjusted for forward looking information to determine the ECL for the portfolio of trade receivables at the reporting period.

Loans receivable, loans to associates and joint ventures, and guarantees

The Group applies the IFRS 9 general approach to measuring expected credit losses which uses a 12-month expected loss allowance for all loans receivables, loans to associates and joint ventures, and guarantees individually. ECLs are calculated by applying a loss ratio to the balance of each loan and guarantee at each reporting date. The loss ratio for loans is calculated according to the ageing/ payment profile of loans by applying historic write-offs to the payment profile of the loan population. The loss ratio for guarantees is calculated according to the past history of draw downs on the financial guarantee contract population. The historic loss ratio is then adjusted for forward looking information to determine the ECL for each loan and guarantee at the reporting period to the extent that there is a strong correlation between the forward looking information and the ECL. To calculate an ECL, management allocates a risk rating to each loan and guarantee. The risk rating is assigned an average cumulative default rate, based on management assessing market-related default rates for emerging markets. This rate is added to the historical loss ratio to determine the ECL of the relevant loan or guarantee.

Critical accounting judgements and assumptions

The ECL for financial assets is based on assumptions about risk of default and expected loss rates. The Group uses judgement in making these assumptions and selecting the input to the impairment calculation, based on the Group’s past history, existing market conditions, as well as forward looking estimates at the end of each reporting period.

IFRS 9 transition

The Group has applied IFRS 9 – Financial Instruments using the modified retrospective approach, by recognising the cumulative effect of initially applying IFRS 9 as an adjustment to the opening balance of equity at 1 June 2018. Therefore the comparative information on the Group statement of financial position and Group statement of comprehensive income has not been restated for the adoption of these new standards and continues to be reported under the previously applied standards.

In accordance with the requirements of applying the modified retrospective approach under IFRS 9, the Group statement of financial position as at 31 May 2018 has been presented below with the changes in the carrying amounts on 1 June 2018 arising from the change in measurement attribute on transition to IFRS 9.

Group statement of financial position
As at		 Restated*
31 May  
2018  
R'000  		   IFRS 15
adjustments
R’000		   1 June
2018
R’000		  
ASSETS            
Non-current assets 9 412 758   (35 846)   9 376 912  
Property, plant and equipment 137 120   —    137 120  
Intangible assets 1 076 871   —    1 076 871  
Goodwill 1 036 243   —    1 036 243  
Investments in and loans to associates and joint ventures 6 684 585   (45 283)   6 639 302  
Loans receivable 53 270   —    53 270  
Starter pack assets —   —    —  
Trade and other receivables 22 757   —    22 757  
Advances to customers 356 689   —    356 689  
Deferred taxation assets 45 223   9 437    54 660  
Current assets 8 526 636   (42 450)   8 484 186  
Starter pack assets —   —    —  
Loans to associate 1 029 626   —    1 029 626  
Inventories 597 946   —    597 946  
Loans receivable 207 799   (8 328)   199 471  
Trade and other receivables 4 292 970   (32 876)   4 260 094  
Advances to customers 1 238 321   (1 246)   1 237 075  
Financial asset at fair value through profit and loss 168 144   —    168 144  
Current tax assets 43 942   —    43 942  
Cash and cash equivalents 947 888   —    947 888  
Total assets 17 939 394   (78 296)   17 861 098  
EQUITY AND LIABILITIES            
Capital and reserves 9 515 085   (97 325)   9 417 760  
Issued share capital and premium 7 844 847   —    7 844 847  
Other reserves (2 814 202)   —    (2 814 202)  
Retained earnings 4 327 523   (95 888)   4 231 635  
Total ordinary shareholders’ equity 9 358 168   (95 888)   9 262 280  
Non-controlling interest 156 917   (1 437)   155 480  
Non-current liabilities 1 743 240   —    1 743 240  
Deferred taxation liabilities 229 100   —    229 100  
Borrowings 1 514 140   —    1 514 140  
Current liabilities 6 681 069   19 029    6 700 098  
Trade and other payables 4 990 798   19 029    5 009 827  
Provisions 39 628   —    39 628  
Financial liabilities at fair value through profit and loss 143 307   —    143 307  
Current tax liabilities 50 368   —    50 368  
Borrowings 1 456 968   —    1 456 968  
Total equity and liabilities 17 939 394   (78 296)   17 861 098  

* As a result of the prior year errors, the Group has restated their comparative financial information. Refer to note 11 for details.