| 2. | GROUP COMPOSITION |
| Basis of consolidation | |
(a) Subsidiaries Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date; any gains or losses arising from such remeasurement are recognised in profit or loss. Acquisition-related costs are expensed as incurred. Any contingent consideration to be transferred is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability are recognised in profit or loss in other income or other expenses. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group’s accounting policies. (b) Changes in ownership interests in subsidiaries without change of control Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions, i.e. transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. When entering into a written put on a non-controlling interest, the initial liability is recognised at the present value of the expected settlement price with a corresponding adjustment to equity, thereafter if the non-controlling interest continues to be recognised, the Group takes subsequent changes in the expected changes in the liability as an adjustment in profit or loss. The Group believes this is an appropriate accounting policy, because as there is no clear guidance in IFRS as to whether IFRS 9 or 10 should be applied to the presentation of the remeasurement of a liability. (c) Disposal of subsidiaries When the Group ceases to have control, any retained interest in the entity is remeasured to its fair value at the date when control is lost, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. (d) Associates and joint ventures Investments in associates and joint ventures are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The Group’s investment in associates and joint ventures includes goodwill identified on acquisition. Loans made to associates and joint ventures that are equity in nature are treated as part of the cost of the investment made. Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. The Group’s share of post-acquisition profit or loss is recognised in the income statement, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. The carrying amount of the investment is also adjusted for the Group’s share of post-acquisition movements in other net assets. The Group excludes equity-settled share-based payment charges from its share in profits or losses from associates and joint ventures. As a result, it does not recognise the corresponding attributable share of the related share-based payment reserve within equity. The Group determines at each reporting date if there are any indicators which would require the Group to test whether the investment in the associate or joint venture is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value and recognises the amount adjacent to share of profit/(loss) from associates in the income statement. Dilution gains and losses arising in investments in associates and joint ventures are recognised in the income statement. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to profit or loss where appropriate. When the Group’s share of losses in an associate or joint venture equals or exceeds its interests in the associate or joint venture (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate or joint venture), the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture. Critical accounting judgements and assumptions (a) Valuation of intangible assets acquired as part of a business combination The fair values of all identifiable intangible assets acquired as part of a business combination are determined using recognised valuation techniques. Such techniques often rely on forecasts of future cash flows and the use of appropriate discount rates that reflect the risk factors associated with the cash flows. These valuations are based on information at the time of the acquisition and the expectations and assumptions that have been deemed reasonable by the Group’s management. The risk exists that the underlying assumptions or events associated with such assets will not occur as projected. For these reasons, among others, the actual cash flows may vary from forecasts of future cash flows. (b) Assessment of investment in associates and joint ventures for impairment The Group tests annually whether investment in associates and joint ventures has suffered any impairment, in accordance with the accounting policy. The recoverable amounts of the investment in associates and joint ventures have been determined based on value-in-use calculations. These calculations require the use of estimates. In the current year there were significant impairments on our associates, the details related to which are included in note 2.1. (c) Classification of significant joint arrangements The Group exercises judgement in determining the classification of its joint arrangements. Blue Label Mexico S.A. de C.V. The Group holds an effective interest of 47.56% in the issued ordinary share capital of Blue Label Mexico S.A. de C.V. The joint arrangement provides the Group and the other parties to the agreement with rights to the net assets of the entity. The investment is classified as a joint venture as unanimous approval of the shareholders is required for decisions. 2DFine Holdings Mauritius The Group holds an effective interest of 50% in the issued ordinary share capital of 2DFine Holdings Mauritius. The joint arrangement provides the Group and the other parties to the agreement with rights to the net assets of the entity. The investment was classified as a joint venture as unanimous approval of the shareholders is required for decisions. SupaPesa Africa Limited Viamedia Proprietary Limited (75% owned by the Group) holds 50% of SupaPesa Africa Limited. Therefore the Group equity accounts for 50% of net assets. The joint arrangement provides the Group and the other parties to the agreement with rights to the net assets of the entity. The investment is classified as a joint venture as unanimous approval of the shareholders is required for decisions. (d) Classification of significant associates Cell C Limited Blue Label Telecoms acting through its wholly owned subsidiary, The Prepaid Company Proprietary Limited, acquired a 45% interest in Cell C Limited. The Group will be entitled to appoint four of the 11 directors to the Cell C board which will represent 36% of the overall votes of the board. Based on the Group’s shareholding and representation on the board, management has assessed Cell C Limited to be an associate as the Group will have the power to participate in (but not control) the financial and operating policy decisions of Cell C Limited. 3G Proprietary Limited Blue Label Telecoms acting through its wholly owned subsidiary, The Prepaid Company Proprietary Limited (TPC), concluded an agreement to acquire 100% of 3G Mobile Proprietary Limited (3G Mobile) from its shareholders. The acquisition has been structured in two stages, whereby 47.37% was initially acquired and the remaining 52.63% was acquired, subject to the fulfilment of conditions precedent, the last of which was Competition Tribunal consent. During the initial stage where TPC owned 47.37%, TPC could appoint two out of eight of the directors on the board of 3G Mobile. Based on board representation and shareholding prior to the Competition Tribunal consent management concluded this was an associate as the Group would have the power to participate in (but not control) the financial and operating policy decisions of 3G Mobile. Oxigen Services India Private Limited (Oxigen Services India) and Oxigen Online Services India Private Limited (Oxigen Online) Blue Label Telecoms Limited (BLT) acting through its wholly owned subsidiary, Gold Label Investments Proprietary Limited (GLI), acquired a 50% interest in 2DFine Holdings Mauritius. BLT’s investment through GLI is classified as a joint venture as unanimous approval of the shareholders is required for decisions. As at 31 May 2019, 2DFine Holdings Mauritius and GLI hold 33.89% and 41.90% respectively of Oxigen Services India. BLT therefore has an effective interest of 58.85% in Oxigen Services India. Based on the nature of Oxigen Services India and Oxigen Online, management has concluded that the relevant activities (based on IFRS 10 paragraph B11 – B12) of these entities include:
Decisions over these relevant activities are made by the majority vote of the board of directors. The ability of the shareholders to appoint directors to the board is dictated by the shareholders’ agreement which requires:
BLT is able to appoint three directors to the board and therefore does not have current rights that give it power over the investee (IFRS 10 paragraph B14 – B15). In addition to this, the shareholders’ agreement dictates that the other shareholder, Neptune, has the power to appoint the Managing Director and Chairman of the company with management control over the company and with responsibility of running the day-to-day affairs of the company. As the Group has no power over the investee we have concluded that the Group has significant influence over the financial and operating policies of Oxigen Services India and Oxigen Online and accounts for these as associates even though the Group effectively owns more than 50%. (e) Deferred tax assessment in associates Prior to the acquisition of Cell C Limited on 2 August 2017, a deferred tax asset of R2 172 million had been recognised by it relating to unrecognised tax losses. Post-acquisition, a further R1 922 million deferred tax asset was recognised for the year ended 31 May 2018, at which date the deferred tax asset totalled R4 094 million. For the year ended 31 May 2019, the entire deferred tax asset was derecognised. The Group applied its judgement as to whether a deferred tax asset relating to unrecognised tax losses should be recognised at the acquisition date. IAS 12 Income Taxes, explains that a deferred tax asset should be recognised for tax losses to the extent that it is probable that future profits will be available against which the unused tax losses can be utilised. On the one hand, IAS 12 explains that a history of recent losses is strong evidence that a deferred tax asset should not be recognised. However, IAS 12 also explains that when the tax losses arise from identifiable causes which are unlikely to recur, this may indicate that a deferred tax asset should be recognised. Based on the factors in IAS 12, the Group concluded that it was probable that a deferred tax asset of R2 172 million would be recoverable at the acquisition date. Following the acquisition date, subsequent events provided Cell C with additional comfort that it was probable that a further amount of the unrecognised tax losses would be utilised in the future, resulting in the post-acquisition recognition of a further R1 922 million deferred tax asset in Cell C. This resulted in the Group recognising its share of this tax benefit (R865 million) as part of its equity accounted earnings for the year ended 31 May 2018. The events giving rise to the additional deferred tax asset being recognised post-acquisition, for the year ended 31 May 2018, were as follows:
As at 31 May 2019, based on estimated future profitability, not taking into account the benefits of new technology, expansionary growth or the pending recapitalisation transaction, the company derecognised its entire deferred tax asset for the underlying reasons:
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