Change in accounting policy
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 is offset by the impairment of the investment in Cell C to zero, resulting in an immaterial effect on net profit after tax. | |
| 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 Group's policy is therefore only to recognise the variable consideration as revenue as and when it's 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 summarised Group statement of financial position and summarised 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 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 gains/(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 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 | 24 187 | – | 24 187 |
| Earnings per share for profit attributable to: | |||
| Equity holders (cents) | |||
| – 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 | 2 517 680 | (26 118) | 2 491 562 |
| Issued share capital and premium | 7 599 016 | – | 7 599 016 |
| Other reserves | (2 824 740) | – | (2 824 740) |
| Retained earnings | (2 378 913) | (26 118) | (2 405 031) |
| Total ordinary shareholders' equity | 2 395 363 | (26 118) | 2 369 245 |
| Non-controlling interest | 122 317 | – | 122 317 |
| Non-current liabilities | 1 960 247 | (8 327) | 1 951 920 |
| Deferred taxation liabilities | 244 727 | (8 327) | 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 |
| Adjustments to retained earnings | IFRS 15 adjustments R’000 |
||
| 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 |
IFRS 9 FINANCIAL INSTRUMENTS
IFRS 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, and
- 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 drawdowns 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 summarised Group statement of financial position and summarised 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 31 May 2019
| Restated* 31 May 2018 R'000 |
IFRS 9 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 | ||
| Investments in and loans to venture capital associates and joint ventures | – | – | – | ||
| 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 | ||
| Financial guarantee contracts | – | – | – | ||
| 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 | ||
| Bank overdraft | – | – | – | ||
| 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 the prior year errors note. |
Audited results for the year ended 31 May 2019