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Implementation of IFRS 16: Leases
SHOPRITE HOLDINGS LIMITED
(Reg. No. 1936/007721/06)
(ISIN: ZAE 000012084)
(JSE Share code: SHP)
(NSX Share code: SRH)
(LuSE Share code: SHOPRITE)
("Shoprite Holdings" or "the Group")
IMPLEMENTATION OF IFRS 16: LEASES
The purpose of this announcement is to communicate Shoprite Holdings'
adoption of IFRS 16: Leases (IFRS 16) effective for financial years
beginning on or after 1 January 2019. The Group hereby publishes its
restated 30 June 2019 financial results accordingly.
IFRS 16 is a new financial reporting standard on leases replacing the
previous IAS 17: Leases (IAS 17), requiring an accounting change. The main
objective of IFRS 16 is to recognise and reflect a company's lease
obligations in its financial statements by aligning the accounting and
presentation of operating leased assets with those of owned and finance
leased assets.
The Group has adopted the new standard with effect from 1 July 2019 using
the full retrospective approach. Accordingly, the Group's 30 June 2019
comparative financial results have been restated from a transition date of
2 July 2018.
IFRS 16 has a significant impact on the presentation and classification of
the statement of comprehensive income, statement of financial position, the
statement of cash flows and certain key performance metrics. However, it has
no impact on the Group's underlying economic model, revenue or net cash
flow.
The application of IFRS 16 requires the majority of the Group's leased
property, vehicles, machinery and equipment and other small item leased
assets to be brought onto the statement of financial position in accordance
with the aforementioned approach. The Group has elected not to recognise
right-of-use assets and lease liabilities for low-value assets and
short-term leases. The Group defines low-value assets, as assets with a cost
price below R75 000. Low-value assets comprise IT equipment. Short-term
leases comprise equipment and vehicle leases with a term of 12 months or
less.
On the statement of financial position, IFRS 16 requires the recognition of
a lease liability and a corresponding right-of-use asset. At the
commencement date of a qualifying lease, the lease liability and
corresponding asset are raised by discounting future lease payments.
Management uses the rate implicit in the lease for vehicle leases and the
lessee's incremental borrowing rate for all other leases. Whilst the lease
liability and right-of-use asset are initially recognised at the same value,
except in the case of prepaid leases, they reduce differently over the lease
term as explained herein.
On the statement of comprehensive income, IFRS 16 replaces the previously
recognised straight-line rental expense required under IAS 17 with a
straight-line depreciation charge over the shorter of the underlying assets'
useful life and the lease term. The right-of-use asset therefore reduces by
the depreciation charge. The IFRS 16 lease liability results in an implied
interest charge on the outstanding lease liability. The lease liability
reduces over the term of the lease by the value of the lease payments, net
of the implied interest charge, as payments are made. It is for this reason
that IFRS 16 is dilutive to profit before tax and earnings per share at the
initial stages of a lease and accretive at the end of the lease. However,
over the term of the lease, the finance charges and depreciation will equal
the rental payments.
In accordance with IAS 36: Impairment of assets, on recognition and at each
reporting date, the right-of-use asset is subject to impairment testing and
any such impairments are classified under items of a capital nature in the
statement of comprehensive income.
The impact of the IFRS 16 adoption on the Group's 30 June 2019 results is
summarised as follows:
On the statement of financial position:
- An IFRS 16 lease liability of R21.5 billion and right-of-use asset
of R15.7 billion has been raised;
- Retained earnings has been reduced by R4.0 billion inclusive of a
R3.3 billion adjustment to opening retained earnings on 2 July 2018;
- A deferred income tax asset of R1.0 billion has been raised. This is
due to temporary differences between the lease liability and right-of-use
asset;
- Trade and other receivables decreased by R0.8 billion due to a
reclassification of prepaid leases to right-of-use assets; and
- The fixed escalation operating lease accrual and onerous lease
provision of R1.5 billion has been derecognised.
On the statement of comprehensive income:
- Group sales and gross profit are unaffected;
- Depreciation increased by R2.5 billion due to the creation of the
right-of-use asset;
- Operating lease expense declined by R4.2 billion as a result of the
derecognition of the IAS 17 straight-line rental expense;
- There was an increase in the net monetary gain on the creation of the
right-of-use asset. It is important to note that these restated results
still apply hyperinflation accounting in accordance with IAS 29:
Financial reporting in hyperinflationary economies;
- Group trading profit increased by R1.7 billion;
- Exchange rate losses increased by R0.5 billion mainly due to the Group's
US dollar leases. From the 2020 financial year, the Group will apply net
investment hedge accounting to reduce this impact;
- Items of a capital nature increased by R0.4 billion as a result of the
required annual impairment testing on the right-of-use asset created;
- Finance costs increased by R1.8 billion. This is due to the implied
interest charge raised on the aforementioned R21.5 billion IFRS 16 lease
liability;
- Group profit before tax declined by R1.0 billion to R5.4 billion; and
- Previously reported diluted headline earnings per share of 779.9c
decreased by 81.4c to 698.5c.
On the statement of cash flows:
- Lease payments which were previously included in operating activities
are now allocated between principle and finance costs. The principle
lease payments are included in financing activities and the finance cost
remains in operating activities;
- The Group's net cash flow is not affected; and
- Dividends paid are not affected.
The application of IFRS 16 does not impact the Group's underlying business,
operations, liquidity or cash flow. It also does not affect the Group's
business strategy on leasing or otherwise.
The complete restated comparative financial information for the 2019
financial year included in Annexure A is the responsibility of the directors
of Shoprite Holdings. It has been prepared for illustrative purposes only
and has not been reviewed or reported on by the Group's auditors.
The Group is hosting an IFRS 16 briefing webcast call on 18 February 2020.
It will be hosted by the Group chief financial officer, Anton de Bruyn,
and will follow the format of a short presentation followed by an
opportunity for questions and answers. Registration will be via
http://www.corpcam.com/shoprite18022020. The presentation will be available on
the company website www.shopriteholdings.co.za shortly before the webcast
begins.
Pieter Engelbrecht Anton de Bruyn Natasha Moolman
Chief executive officer Chief financial officer Group investor relations
14 February 2020
Sponsor: Nedbank Corporate and Investment Banking
ANNEXURE A: RESTATEMENT OF FINANCIAL RESULTS
PRO FORMA STATEMENT OF COMPREHENSIVE INCOME
As
previously
reported Impact of Restated
52 weeks to IFRS 16 52 weeks to
30 Jun '19 30 Jun '19 30 Jun '19
Rm Rm Rm
Sale of merchandise 150 395 - 150 395
Cost of sales (115 074) - (115 074)
GROSS PROFIT 35 321 - 35 321
Other operating income 3 218 - 3 218
Depreciation and amortisation (2 640) (2 513) (5 153)
Operating leases (4 643) 4 189 (454)
Employee benefits (11 997) - (11 997)
Other operating expenses (13 303) - (13 303)
Net monetary gain (hyperinflation) 920 27 947
TRADING PROFIT 6 876 1 703 8 579
Exchange rate gains/(losses) 115 (458) (343)
Items of a capital nature (80) (416) (496)
OPERATING PROFIT 6 911 829 7 740
Interest received from bank
account balances 273 - 273
Finance costs (845) (1 814) (2 659)
PROFIT BEFORE INCOME TAX 6 339 (985) 5 354
Income tax expense (2 068) 194 (1 874)
PROFIT FOR THE PERIOD 4 271 (791) 3 480
OTHER COMPREHENSIVE INCOME, NET OF
INCOME TAX (2 773) 120 (2 653)
Items that will not be reclassified to
profit or loss
Re-measurements of post-employment
medical benefit obligations 3 - 3
Items that may subsequently be reclassified
to profit or loss
Foreign currency translation
differences including hyperinflation
effect (2 776) 120 (2 656)
TOTAL COMPREHENSIVE INCOME FOR
THE PERIOD 1 498 (671) 827
PROFIT ATTRIBUTABLE TO: 4 271 (791) 3 480
Owners of the parent 4 260 (792) 3 468
Non-controlling interest 11 1 12
TOTAL COMPREHENSIVE INCOME
ATTRIBUTABLE TO: 1 498 (671) 827
Owners of the parent 1 487 (672) 815
Non-controlling interest 11 1 12
Basic earnings per share (cents) 768.2 (142.9) 625.3
Diluted earnings per share (cents) 767.3 (142.6) 624.7
Basic headline earnings per share (cents) 780.8 (81.6) 699.2
Diluted headline earnings per share (cents) 779.9 (81.4) 698.5
PRO FORMA STATEMENT OF FINANCIAL POSITION
As
previously
reported Impact of Restated
as at IFRS 16 as at
30 Jun '19 30 Jun '19 30 Jun '19
Rm Rm Rm
ASSETS
NON-CURRENT ASSETS 30 212 16 028 46 240
Property, plant and equipment 21 444 - 21 444
Right-of-use assets - 15 741 15 741
Intangible assets 3 077 - 3 077
Government bonds and bills 2 516 - 2 516
Loans receivable 1 664 - 1 664
Deferred income tax assets 629 1 000 1 629
Trade and other receivables 882 (713) 169
CURRENT ASSETS 33 969 (41) 33 928
Inventories 20 889 - 20 889
Trade and other receivables 4 197 (41) 4 156
Current income tax assets 480 - 480
Government bonds and bills 500 - 500
Loans receivable 196 - 196
Cash and cash equivalents 7 707 - 7 707
ASSETS HELD FOR SALE 814 - 814
TOTAL ASSETS 64 995 15 987 80 982
EQUITY
CAPITAL AND RESERVES ATTRIBUTABLE
TO OWNERS OF THE PARENT
Stated capital 7 516 - 7 516
Treasury shares (605) - (605)
Reserves 19 152 (3 962) 15 190
26 063 (3 962) 22 101
NON-CONTROLLING INTEREST 114 (8) 106
TOTAL EQUITY 26 177 (3 970) 22 207
LIABILITIES
NON-CURRENT LIABILITIES 11 204 17 807 29 011
Lease liabilities - 19 158 19 158
Borrowings 9 044 - 9 044
Deferred income tax liabilities 568 (30) 538
Provisions 289 (18) 271
Fixed escalation operating lease accruals 1 303 (1 303) -
CURRENT LIABILITIES 27 614 2 150 29 764
Trade and other payables 19 495 (170) 19 325
Contract liabilities 791 - 791
Lease liabilities - 2 320 2 320
Borrowings 2 662 - 2 662
Current income tax liabilities 423 - 423
Provisions 119 - 119
Bank overdrafts 4 124 - 4 124
TOTAL LIABILITIES 38 818 19 957 58 775
TOTAL EQUITY AND LIABILITIES 64 995 15 987 80 982
PRO FORMA STATEMENT OF CASH FLOWS
As
previously
reported Impact of Restated
52 weeks to IFRS 16 52 weeks to
30 Jun '19 30 Jun '19 30 Jun '19
Rm Rm Rm
CASH FLOWS FROM OPERATING ACTIVITIES 635 2 269 2 904
Operating profit 6 911 829 7 740
Less: investment income and finance
income earned (764) - (764)
Non-cash items 2 362 3 258 5 620
Changes in working capital (3 520) (8) (3 528)
Cash generated from operations 4 989 4 079 9 068
Interest received 1 020 - 1 020
Interest paid (874) (1 810) (2 684)
Dividends received 22 - 22
Dividends paid (2 430) - (2 430)
Income tax paid (2 092) - (2 092)
CASH FLOWS UTILISED BY INVESTING
ACTIVITIES (4 693) (24) (4 717)
Investment in property, plant and
equipment and intangible assets
to expand operations (3 709) - (3 709)
Investment in property, plant and
equipment and intangible assets
to maintain operations (1 571) - (1 571)
Prepayments for right-of-use assets - (24) (24)
Proceeds on disposal of property,
plant and equipment and intangible assets 265 - 265
Proceeds on disposal of assets held for sale 184 - 184
Payments for government bonds and bills (1 017) - (1 017)
Proceeds from government bonds and bills 1 444 - 1 444
Amounts paid to Resilient Africa (Pty) Ltd (51) - (51)
Other loans receivable advanced (437) - (437)
Cash inflows from other loans receivable 204 - 204
Acquisition of operations (5) - (5)
CASH FLOWS FROM FINANCING ACTIVITIES 4 397 (2 245) 2 152
Repayment of lease liability obligations - (2 245) (2 245)
Purchase of treasury shares (115) - (115)
Proceeds from treasury shares disposed 13 - 13
Repayment of borrowings (4 271) - (4 271)
Borrowings raised 8 770 - 8 770
NET MOVEMENT IN CASH AND CASH EQUIVALENTS 339 - 339
Cash and cash equivalents at the
beginning of the period 3 470 - 3 470
Effect of exchange rate movements
and hyperinflation on cash and
cash equivalents (226) - (226)
CASH AND CASH EQUIVALENTS AT THE END
OF THE PERIOD 3 583 - 3 583
Consisting of:
Cash and cash equivalents 7 707 - 7 707
Bank overdrafts (4 124) - (4 124)
3 583 - 3 583
Date: 14-02-2020 01:38:00
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