3. FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
3.8 Leases
 

The Group has adopted IFRS 16 – Leases from 1 June 2019. Refer to note 10.5 for a description of the nature and effect of the change in accounting policy.

  Retail 
space 
R'000 
Office 
space 
R'000 
Warehouse 
space 
R'000 
Total 
R'000 
  
Lease liabilities                
Opening balance  —  —  —  —    
Adoption of IFRS 16  21 163  132 628  568  154 359    
Increase in liabilities  7 454  22 806  3 077  33 337    
Interest expense – continuing operations  —  11 498  188  11 686    
Interest expense – discontinued operations  2 157  523  —  2 680    
Repayments  (15 726) (36 341) (1 142) (53 209)   
Lease modifications  13 575  (5 196) —  8 379    
Disposal of subsidiaries  —  (15 366) —  (15 366)   
Termination of leases  —  —  (743) (743)   
Closing balance  28 623  110 552  1 948  141 123    
Included in current liabilities  (28 623) (30 318) (1 261) (60 202)   
  —  80 234  687  80 921    
Lease assets        
Opening balance  —  —  —  —    
Adoption of IFRS 16  21 163  127 834  568  149 565    
Additions  7 454  21 430  3 077  31 961    
Depreciation – continuing operations  —  (31 135) (1 106) (32 241)   
Depreciation – discontinued operations  (10 514) (1 078) —  (11 592)   
Impairments – continuing operations  —  —  —  —    
Impairments – discontinued operations  (18 103) (12 609) —  (30 712)   
Lease modifications  —  (4 743) —  (4 743)   
Disposal of subsidiaries  —  (13 694) —  (13 694)   
Termination of leases  —  —  (692) (692)   
Closing balance  —  86 005  1 847  87 852    

The Group leases various offices, warehouses and retail stores. Rental contracts are typically made for fixed periods of one to four years but may have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

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.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

  • fixed payments (including in-substance fixed payments), less any lease incentives receivable;
  • variable lease payment that are based on an index or a rate;
  • amounts expected to be payable by the lessee under residual value guarantees; and
  • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. To determine this rate, the Group, where possible, uses recent third-party financing received, adjusted to reflect changes in circumstances and financing conditions since financing was obtained.

Right-of-use assets are measured at cost comprising the following:

  • the amount of the initial measurement of lease liability;
  • any lease payments made at or before the commencement date less any lease incentives received;
  • any initial direct costs; and
  • restoration costs.

Payments associated with short-term leases (12 months or less) and leases of low-value assets (less than R50 000) are recognised on a straight-line basis as an expense in profit or loss.

Critical accounting judgements and assumptions

The term of a lease includes periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option. The Group did not take into account renewals in the majority of leases as there is material uncertainty as to whether the option to renew will be exercised. Material uncertainty arises in cases where BLT is not locked into renewals, alternative leasing arrangements are available and there is no firm commitment or formal decision to renew.