10. ACCOUNTING FRAMEWORK
10.5 Change in accounting policy
 

IFRS 16

The Group has adopted IFRS 16 – Leases from 1 June 2019 under the modified retrospective approach, and has therefore not restated comparatives for the previous reporting period, as permitted under this specific transitional provision in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 June 2019.

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 June 2019. Lease payments escalate at fixed rates. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 June 2019 was 10.44%.

  R'000   
Operating lease commitments disclosed as at 31 May 2019 182 938   
Lease commitments discounted using the lessee's incremental borrowing rate at 1 June 2019 155 429   
Less short-term leases recognised on a straight-line basis as expense (5 799)  
Less adjustments as a result of a different treatment of extension and termination options 4 729   
Lease liability recognised as at 1 June 2019 154 359   

The associated right-of-use assets are 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 31 May 2019.

Operating profit increased by R7.2 million and earnings per share decreased by 0.5 cents for the year ended 31 May 2020 as a result of the adoption of IFRS 16. On the Group statement of financial position, a right-of-use asset of R150 million and a lease liability of R154 million was recognised at 1 June 2019 as a result of the adoption of IFRS 16. There was no effect on opening retained earnings.

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 of which the Group had none;
  • the accounting for operating leases with a remaining lease term of less than 12 months as at 1 June 2019 as short-term leases;
  • the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and
  • the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

The Group has also elected not to reassess whether a contract is or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Group relied on its assessment made applying IAS 17 and IFRIC 4 – Determining whether an Arrangement contains a Lease.

Until 31 May 2019, leases of property, plant and equipment were classified as operating leases. Payments made under operating leases were charged to profit or loss on a straight-line basis over the period of the lease.

From 1 June 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.