BLUE LABEL AUDITED RESULTS FOR THE YEAR ENDED 31 MAY 2020

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.

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.

The Group has adopted IFRS 16 – Leases from 1 June 2019.

	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;
• 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.