Massmart Annual Report 2008

Notes to the annual financial statements
for the year ended 30 June 2008

1.   

Accounting policies

 

Basis of accounting

The financial statements have been prepared on the historical cost basis except for the revaluation of certain non-current assets and financial instruments to fair value.

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and in a manner required by the Companies Act of South Africa. The principal accounting policies adopted are set out below.

These policies have been consistently applied except for Makro Zimbabwe as indicated in note 6.

Basis of consolidation

The Group annual financial statements incorporate the annual financial statements of the Company and the entities it controls. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The operating results of the subsidiaries are consolidated from the date on which effective control is transferred to the Group and up to the effective date of disposal.

Separate disclosure is made of minority interests where the Group’s investment is less than 100%. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority’s interest in the subsidiary’s equity are allocated against the interest of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

All intercompany transactions and balances, income and expenses are eliminated in full on consolidation.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group.

Business combinations

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held-for-sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell.

The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

Segmental information

The Group is organised into four divisions for operational and management purposes. Massmart reports its primary business segment information on this basis and on a secondary basis by significant geographical region based on location of assets.

Comparative figures

When an accounting policy is altered, comparative figures are restated if required by the applicable accounting statement and where material. Details of these restatements have been included in the relevant notes to the annual financial statements.

Interests in associates

An associate is an enterprise over which the Group has significant influence, and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

The results, assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held-for-sale, in which case it is accounted for under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The carrying amount of such interests is reduced to recognise any decline, other than a temporary decline, in the value of individual investments. The carrying amount reflects the Group’s share of net assets of the associate and includes any goodwill on acquisition, less any impairment in the value of individual investments.

Any excess of the cost of acquisition over the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any deficiency of the cost of acquisition below the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition (ie discount on acquisition) is credited to profit or loss in the period of acquisition.

Where a Group enterprise transacts with an associate of the Massmart Group, unrealised profits and losses are eliminated to the extent of the Group’s interest in the relevant associate, except where unrealised losses provide evidence of an impairment of the asset transferred.

Goodwill

Goodwill arising on consolidation of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (ie discount on acquisition) is credited to profit or loss in the period of acquisition.

Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

The Group’s policy for goodwill arising on the acquisition of an associate is described under “Interests in associates” above.

Non-current assets held for sale

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of the assets’ previous carrying amount and fair value less costs to sell.

Property, plant and equipment

Freehold land is shown at cost and is not depreciated. Property, plant and equipment is shown at cost less accumulated depreciation, and reduced by any accumulated impairment losses.

Property cost includes professional fees. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

Where expenditure incurred on property, plant and equipment will lead to future economic benefits accruing to the Group, these costs are capitalised. Repairs and maintenance are expensed as and when incurred.

Depreciation is charged so as to write off the cost of assets, other than land, over their estimated useful lives, using the straight-line method, on the following bases:

 
  • Buildings
50 years
 
  • Fixtures, fittings, plant, equipment and motor vehicles
4 to 10 years
 
  • Computer hardware
3 to 8 years
 
  • Leasehold improvements
Shorter of lease period or useful life
 

Useful life and residual value is reviewed annually and the prospective depreciation is adjusted accordingly.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

Internally-generated intangible assets – research and development expenditure

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

Internally-generated intangible assets are amortised on a straight-line basis over their estimated useful lives. Where no internally-generated intangible asset can be recognised, development expenditure is charged to profit or loss in the period in which it is incurred.

Intangible assets

Trademarks are measured initially at purchased cost and are amortised on a straight-line basis over their estimated useful lives.

Amortisation is charged so as to write off the cost of assets over their estimated useful lives, using the straight-line method, on the following basis:

 
  • Computer
3 software to 8
 

Useful life is reviewed annually and the prospective depreciation is adjusted accordingly.

Impairment of tangible and intangible assets excluding goodwill

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount for an individual asset, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of an asset (cash-generating unit) is increased to the revised estimate of its recoverable amount. This is done so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Revenue recognition

Revenue of the Group comprises net sales, royalties, franchise fees, interest received, investment income, finance charges, property rentals, management and administration fees, dividends and excludes value-added tax. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales-related taxes.

Sales of goods are recognised when goods are delivered and title has passed.

Interest income is accrued on a time basis, by reference to the principal outstanding and the interest rate applicable.

Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.

Other revenue is recognised on the accrual basis in accordance with the substance of the relevant agreements and measured at fair value of the consideration receivable.

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets held under finance leases are capitalised at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor, net of finance charges, is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to profit or loss.

Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.

Foreign currencies

The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (ie its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in the functional currency of the Group, and the presentation currency for the consolidated financial statements.

Transactions in currencies other than the Group reporting currency (South African Rands) are initially recorded at the rates of exchange prevailing on the dates of the transactions. In order to hedge its exposure to certain foreign exchange risks, the Group has a policy of covering forward all its foreign exchange liability transactions of a trading nature (see below for details of the Group’s accounting policies in respect of such derivative financial instruments).

At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement and retranslation of monetary items are included in profit and loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit and loss for the period. However, where fair value adjustments of non-monetary items are recognised directly in equity, exchange differences arising on the retranslation of these non-monetary items are also recognised directly in equity.

On consolidation, the assets and liabilities of the Group’s overseas operations (including comparatives) are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.

The financial statements (including comparatives) of foreign subsidiaries and associates that report in the currency of a hyperinflationary economy are restated in terms of the measuring unit current at the balance sheet date before they are translated into South African Rands.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Government grants

Government grants for staff training costs are recognised in profit or loss over the periods necessary to match them with the related costs and are deducted in reporting the related expense. Income is not recognised until there is reasonable assurance that the grants will be received.

Retirement benefit costs

Payments to defined contribution plans are charged as an expense as they fall due. There are no defined retirement benefit plans in the Group.

Post-retirement healthcare benefit

Post-retirement healthcare benefits are provided by certain Group companies to qualifying employees and pensioners. The healthcare benefit costs are determined through annual actuarial valuations by independent consulting actuaries using the projected unit credit method. Such gains or losses are recognised over the expected remaining working lives of the participating members. Adjustments are made annually through profit or loss for provisions held for members who have already retired. Actuarial gains and losses are recognised in full in the period in which they occur.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax charge payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred taxation is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. In general, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities, which affects neither the tax profit nor the accounting profit at the time of the transaction.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

Secondary Taxation on Companies (STC) is payable on net dividends paid and is recognised as a tax charge in profit or loss in the year it is incurred.

Any tax on capital gains is deferred if the proceeds of the sale of the assets are invested in similar assets. The tax will ultimately become payable on sale of the similar asset.

Inventories

Inventories, which consist of merchandise, are valued at the lower of cost and net realisable value. Cost is calculated on the weighted-average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

Financial instruments

Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Financial assets are classified into the following specified categories: financial assets as ‘at fair value through profit or loss’, ‘held-to-maturity investments’, ‘available-for-sale financial assets’ and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.

Income is recognised on an effective interest basis for debt instruments other than those financial assets designated as ‘at fair value through profit or loss’.

Loans and receivables

Trade receivables, loans and other receivables are measured initially at fair value, and are subsequently measured at amortised cost using the effective interest method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit and loss when there is objective evidence that the asset is impaired.

Cash and cash equivalents

Cash and cash equivalents are measured at fair value. For purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held on call with banks and investments in money-market instruments that are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value, net of bank overdrafts.

Investments

Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs.

At subsequent reporting dates, debt securities that the Group has the express intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost using the effective interest method, less any impairment loss recognised to reflect irrecoverable amounts. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.

Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised.

Investments other than held-to-maturity debt securities are classified as either investment held-for-trading or as available-for-sale, and are subsequently measured at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period.

Unrealised gains and losses on available-for-sale investments are recognised directly in equity until the disposal or impairment of the relevant investment, at which time the cumulative gain or loss previously recognised in equity is included in the profit or loss for the period. Impairment losses recognised in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognised in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss.

Listed investments are carried at market value, which is calculated by reference to stock exchange quoted selling prices at the close of business on the balance sheet date.

Financial liabilities and equity

Financial liabilities are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. Debt instruments issued, which carry a right to convert to equity that is dependent on the outcome of uncertainties beyond the control of both the Group and the holder, are classified as liabilities except where conversion is certain. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

Financial liabilities, other than derivative instruments, are recognised at amortised cost, comprising original debt less principal payments and amortisations.

Financial liabilities include finance lease obligations, interest-bearing bank loans and overdrafts, and trade and other payables. The accounting policy for finance lease obligations is outlined here.

Bank borrowings

Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings in accordance with the Group’s accounting policy for borrowing costs.

Trade payables

Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method.

Equity instruments

Equity instruments are recorded at the proceeds received, net of direct issue costs.

Derivative financial instruments and hedge accounting

The Group’s activities expose it primarily to the financial risks of changes in foreign exchange rates and interest rates.

The Group uses foreign exchange forward contracts to hedge its exposure to foreign currency fluctuations relating to certain firm trading commitments. The use of financial derivatives is governed by the Group’s policies approved by the Board of Directors, which provide written principles on the use of financial derivatives consistent with the Group’s risk management strategy. The Group does not trade in derivative financial instruments for speculative purposes.

Derivative financial instruments are initially measured at fair value on the contract date, and are re-measured to fair value at subsequent reporting dates.

The effective portion of the changes in fair value of derivative financial instruments that are designated and qualify as cash flow hedges are recognised directly in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. If the hedged firm commitment or forecast transaction results in the recognition of an asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. Amounts deferred in equity are recognised in profit or loss in the same period in which the hedged firm commitment affects profit or loss.

Changes in the fair value of derivative financial instruments that do not qualify as cash flow hedges are recognised in profit or loss as they arise.

The hedge is de-designated as a cash flow hedge at the Shipped on Board date, and discontinued when the hedging instrument is sold, expired, terminated, exercised, or no longer qualifies for hedge accounting. At the time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecast transaction is recognised in profit or loss. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to profit or loss for the period.

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that the Group will be required to settle that obligation. Provisions are measured at management’s best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material.

Share-based payments

The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions.

Fair value is measured by use of a Binomial model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

Borrowing costs

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

2.  

Technical review

 

International Financial Reporting Standards (IFRS)

Massmart adopted International Financial Reporting Standards (IFRSs), with effect from 1 July 2005. The Group is exposed to the following suite of standards. The impact of each standard has been indicated in the right-hand column.

  Standard Standards Name Impact
  IFRS 1 First-time Adoption of IFRS Immaterial financial impact and increased disclosure
  IFRS 2 Share-based Payment Material financial impact and increased disclosure
  IFRS 3 Business Combinations Immaterial financial impact and increased disclosure
  IFRS 4 Insurance Contracts None
  IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Immaterial financial impact and increased disclosure
  IFRS 6 Exploration for and Evaluation of Mineral Resources None
  IFRS 7 Financial Instruments: Disclosures No financial impact but increased disclosure
  IFRS 8 Operating Segments This standard has not been early adopted
  IAS 1 Presentation of Financial Statements No financial impact but increased disclosure
  IAS 2 Inventories No financial impact
  IAS 7 Cash Flow Statements No financial impact
  IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors No financial impact but increased disclosure
  IAS 10 Events after Balance Sheet Date No financial impact but increased disclosure
  IAS 11 Construction Contracts None
  IAS 12 Income Taxes No financial impact
  IAS 14 Segment Reporting No financial impact
  IAS 16 Property, Plant and Equipment Practical application challenging, immaterial financial impact and increased disclosure
  IAS 17 Leases No financial impact
  IAS 18 Revenue No financial impact
  IAS 19 Employee Benefits No financial impact but increased disclosure
  IAS 20 Accounting for Government Grants and Disclosure of Government Assistance None
  IAS 21 The Effects of Changes in Foreign Exchange Rates Material financial impact and increased disclosure
  IAS 23 Borrowing Costs None
  IAS 24 Related-party Disclosures No financial impact but increased disclosure
  IAS 26 Accounting and Reporting by Retirement Benefit Plans None
  IAS 27 Consolidated and Separate Financial Statements Financial impact and increased disclosure
  IAS 28 Investments in Associates Immaterial financial impact and increased disclosure
  IAS 29 Financial Reporting in Hyperinflationary Economies Financial impact and increased disclosure
  IAS 30 Disclosure in FS of Banks and Similar Financial Institutions None
  IAS 31 Interests in Joint Ventures None
  IAS 32 Financial Instruments: Disclosure and Presentation No financial impact but increased disclosure
  IAS 33 Earnings per Share No financial impact but increased disclosure
  IAS 34 Interim Financial Reporting No financial impact but increased disclosure
  IAS 36 Impairment of Assets Immaterial financial impact and increased disclosure
  IAS 37 Provisions, Contingent Liabilities and Contingent Assets No financial impact but increased disclosure
  IAS 38 Intangible Assets Immaterial financial impact and increased disclosure
  IAS 39 Financial Instruments: Recognition and Measurement No financial impact but increased disclosure
  IAS 40 Investment Property None
  IAS 41 Agriculture None
  AC 500 Preface to South African Statements and Interpretations of Statements of Generally Accepted Accounting Practice No financial impact
  AC 501 Accounting for “Secondary Tax on Companies (STC)” No financial impact
  AC 502 Substantively Enacted Tax Rates and Tax Laws No financial impact
  AC 503 Accounting for Black Economic Empowerment (BEE) Transactions No financial impact
       
 

IFRS 8 Operating Segments, was issued on 30 November 2006 to replace IAS 14 Segment Reporting. The effective date of this standard is for year-ends beginning on or after 1 January 2009. Although early adoption is permitted, the Group has chosen not to do so. The standard requires the Group to adopt the ‘management approach’ to reporting segment information, effectively using its internal management reporting system to collect the data. While this is a change in approach from IAS 14 Segment Reporting, the effect will have no financial impact on the Group. The standard will impact Group disclosure.

The IASB will be issuing a revised suite of standards to be effective for year-ends beginning on or after 1 January 2009. IFRS 8 Operating Segments will be adopted as part of that project. We anticipate these new standards will require as much work and planning as the initial IFRS adoption and feel comfortable that we have an adequate experienced team to manage the process.

Interpretations of Statements of Generally Accepted Accounting Practice

The International Financial Reporting Interpretations Committee (IFRIC) is a committee of the International Accounting Standards Board (IASB) that assists the IASB in establishing and improving standards of financial accounting and reporting for the benefit of users, preparers and auditors of financial statements. The role of the IFRIC is to provide timely guidance on newly identified financial reporting issues not specifically addressed in International Financial Reporting Standards (IFRSs) or issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop. It thus promotes the rigorous and uniform application of IFRSs.

The following IFRICs were issued since the start of the financial year or issued earlier but become effective for the current financial year. Many of these have no impact on the Group, and have been included for completeness. The impact of each IFRIC has been indicated in the right-hand column.

     IFRIC Name Effective date Impact on the Group
  IFRIC 4 Determining whether an Arrangement contains a Lease Annual periods beginning on or after 1 January 2006 Extensive research was completed to determine if this IFRIC applied to the Group. It was clear that it did not and thus has no impact on the Group.
  IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds Annual periods beginning on or after 1 January 2006 This IFRIC has no impact on the Group.
  IFRIC 6 Liabilities Arising from Participating in a Specific Market–Waste Electrical and Electronic Equipment Annual periods beginning on or after 1 December 2005 This IFRIC has no impact on the Group.
  IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies Annual periods beginning on or after 1 March 2006 This IFRIC has no impact on the Group. It was written for companies reporting in a hyperinflationary economy for the first time.
  IFRIC 8 Scope of IFRS 2 Share-based Payment Annual periods beginning on or after 1 May 2006 This IFRIC was early adopted. It had an impact on the Group and was incorporated into the IFRS restatement in the prior year.
  IFRIC 9 Reassessment of Embedded Derivatives Annual periods beginning on or after 1 June 2006 This IFRIC has no impact on the Group.
  IFRIC 10 Interim Financial Reporting and Impairment Annual periods beginning on or after 1 November 2006 This IFRIC has no impact on the Group.
  IFRIC 11 IFRS 2 – Group and Treasury Share Transactions Annual periods beginning on or after 1 March 2007 This IFRIC clarifies elements of IFRS 2 and has no additional impact on the Group above the original IFRS.
  IFRIC 12 Service Concession Arrangements Annual periods beginning on or after 1 January 2008 This IFRIC has no impact on the Group.
  IFRIC 13 Customer Loyalty Programmes Annual periods beginning on or after 1 July 2008 This IFRIC has no impact on the Group.
  IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Annual periods beginning on or after 1 January 2008 This IFRIC has no impact on the Group.
         
 

The relevant IFRIC Interpretations have been applied prospectively from the date of issue or other specified effective date.

An IFRIC becomes inoperative and is withdrawn when an IFRS or other authoritative document issued by the IASB that overrides or confirms a previously issued IFRIC becomes effective.

Circulars

A circular is issued by the JSE or the South African Institute of Chartered Accountants (SAICA) where guidance or clarification is required on an identified financial reporting issue on a South African platform (as opposed to an IFRIC, discussed above, that operates on an international platform). This assistance is required to establish and improve standards of financial accounting and reporting for the benefit of users, preparers and auditors of financial statements. It thus promotes the rigorous and uniform application of the standards.

The following circulars were issued since the start of the financial year. Many of these have had no impact on the Group, and have been included for completeness. The impact of each circular has been indicated in the right-hand column.

  Circular Name Date issued Impact on the Group
  Circular 08/2007 Headline Earnings July 2007 This circular will have a financial impact on the Group and has been complied with in full. Refer to note 10.
  Circular 09/2007 Statement of Generally Accepted Accounting Practice for Small- and Medium-sized Entities (SMEs) October 2007 This circular has no impact on the Group.
  Circular 01/2008 Guideline on Fees for Audits done on Behalf of the Auditor-General March 2008 This circular has no impact on the Group.
         
      

Where a circular impacts the Group, the results of the Group have been adjusted retrospectively, as if the Group had always accounted for the circular correctly.

Summary

The Group’s accounting policies are governed by IFRSs and the AC 500 series as issued by the Accounting Practices Board and listed above. Guidance has been obtained from IFRICs and circulars effective on 1 October 2008, also listed above. Due to the nature and volatility of Exposure Drafts (EDs), no review has been provided.

The Group maintains the view that the standards set the minimum requirement for financial reporting. The financial statements in this annual report have been prepared with the aim of exposing the reader to a very detailed view of the numbers, using a simplified approach, in the hope of facilitating a deeper and informed understanding of the business.

      2008 2007
      Rm Rm

3.

Revenue

     
  Sales   39 783,6 34 807,6
  Change in fair value of financial assets carried at fair value through profit or loss 54,0 61,1
  Instalment-sale finance charges 51,3 51,6
  Dividends from unlisted investments 81,2 67,3
  Less: Interest paid on a related liability (75,5) (64,8)
  Royalties and franchise fees 27,7 25,7
  Management and administration fees 0,4 0,4
  Property rentals 2,2 1,2
  Other 19,9 14,6
      39 944,8 34 964,7
         
    Notes    

4.

Impairment of assets

   
  Tangible assets 11 6,6
  Goodwill 12 12,2
  Intangible assets 13 4,7
  Inventory and consumable goods 7,5
      4,7 26,3
         
  The impairment of assets in the current year relates to computer software in Shield (Masscash) due to the IT upgrade which rendered the previous system obsolete and trademarks in Corporate where there were no future benefits. The impairment of assets in the prior year related to the write-off of Dion inventory, consumables and plant and equipment arising from the decision to discontinue the original Dion format and the impairment of certain goodwill in Jumbo arising from a minor acquisition in 2001.
   

5.

Operating profit

     
  Credits to operating profits include:    
  Foreign exchange profit 220,2 113,1
  Profit on disposal of tangible and intangible assets 1,5 4,9
  Insurance gain 2,8
  Charges to operating profit include:    
  Depreciation and amortisation (owned assets):    
    Buildings 4,6 4,5
    Fixtures, fittings, plant and equipment 151,2 119,6
    Computer hardware 43,5 37,2
    Leasehold improvements 25,0 18,1
    Motor vehicles 9,1 8,2
    Computer software 48,0 38,2
    Trademarks 0,4 0,2
  Depreciation and amortisation (leased assets):    
    Buildings 2,0 2,1
    Fixtures, fittings, plant and equipment 1,3 0,9
    Computer equipment   0,3
    Motor vehicles 12,6 11,7
  Foreign exchange loss 157,7 154,5
  Share-based payment expense 109,1 73,3
  Operating lease charges:    
    Land and buildings 705,0 665,3
    Plant and equipment 26,6 24,8
    Computer equipment 9,5 9,9
    Motor vehicles 10,2 10,1
  Loss on disposal of tangible and intangible assets 5,3 5,7
  Fees payable:    
    Administrative and outsourcing services 196,7 181,8
    Consulting 19,9 13,5
  Auditors’ remuneration:    
    Current year fee 13,5 13,7
    Prior year underprovision 0,1 0,9
    Tax advice 0,9 1,7
    Consulting and business reviews 0,4 2,7
    Contract assignments   0,7 0,9

6.

Hyperinflation

     
 

In the 2007 financial year, the decision was made to prospectively deconsolidate the results of the Zimbabwean Makro operations.

In terms of IAS 27 Consolidated and Separate Financial Statements, control is defined as “the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities”. It is evident from the current social, political and economic developments within Zimbabwe that control does not exist. This has been evidenced through the forcing of retailers to sell goods at predetermined prices and the inability of the Massmart Group to repatriate monies. It is Massmart’s view that, throughout the 2008 financial year, it did not have control over the Zimbabwean operations and as such the results remain deconsolidated. This will be assessed on a yearly basis going forward.

On deconsolidation, the investment in Makro Zimbabwe has been reflected as an available-for-sale financial asset in line with the requirements of IAS 39 Financial Instruments: Recognition and Measurement. At year-end, the fair value of this asset has been determined to be zero. Details can be found in note 14.

7.

Net finance costs

   
  Finance costs    
  Interest on bank overdrafts and loans 97,7 88,3
  Interest on obligations under finance leases 12,9 12,1
        110,6 100,4
  Finance income    
  Income from investments and receivables 46,5 56,0
        46,5 56,0
  Details on the loans and finance leases can be found in note 23.

8.

Taxation

   
  Current year    
  South African normal taxation    
     Current taxation 506,0 481,4
     Deferred taxation 33,8 10,1
  Foreign taxation    
     Current taxation 37,4 19,7
     Deferred taxation 5,9 (8,4)
  Secondary taxation on companies 65,9 57,9
  Taxation effect of participation in export partnerships 0,4 0,3
  Total 649,4 561,0
  Prior year under/(over) provision:    
  South African normal taxation    
     Current taxation 5,7 (2,4)
     Deferred taxation 1,4 (2,6)
     Release from equity reserve to income 0,5
  Foreign taxation    
     Current taxation 2,7 0,8
     Deferred taxation (impairment of deferred taxation assets) 3,2 (2,2)
  Secondary taxation on companies 0,2
        13,5 (6,2)
        662,9 554,8
  Two companies in the Group participate in export partnerships. As the companies are liable for the tax effect of the participation, the amount is classified as a taxation charge.
        % %
  The rate of taxation is reconciled as follows:    
  Standard corporate taxation rate 28,0 29,0
  Exempt income (1,1) (1,2)
  Disallowable expenditure 2,3 3,1
  Foreign income 0,1 0,7
  Prior year under-provision (including impairment) 0,7 (0,4)
  Secondary taxation on companies 3,4 3,6
  Other (0,6) (0,7)
  Effective rate 32,8 34,1
           
        2008 2007
        Rm Rm

9.  

Dividends paid to shareholders

   
  Final cash dividend No 15 (2007: No 13) 244,4 160,1
  Interim cash dividend No 16 (2007: No 14) 443,0 396,1
  Thuthukani preference share dividends No 2 and No 3 (2007: No 1) 22,5 8,9
  Total dividends paid 709,9 565,1
 

No 15 of 123 cents declared on 2 October 2007 and paid on 29 October 2007 (R244,4 million). No 16 of 223 cents declared on 20 March 2008 and paid on 25 March 2008 (R443,0 million).

No 17 of 163 proposed on 20 August 2008 to be declared on 12 September 2008 and paid on 15 September 2008 (R327,9 million).

No 2 of 30,75 cents declared on 2 October 2007 and paid on 25 October 2007 to the Massmart Thuthukani Empowerment Trust (R5,0 million).

No 3 of 111,5 cents declared on 20 March 2008 and paid on 25 March 2008 to the Massmart Thuthukani Empowerment Trust (R17,5 million).

No 4 of 81,5 cents proposed on 20 August 2008 to be declared on 12 September 2008 and paid on 15 September 2008 to the Massmart Thuthukani Empowerment Trust (R164,0 million).

      2008     2007  
     Pre-taxation Post-taxation   Pre-taxation Post-taxation  
    Rm Rm Cents/share Rm Rm Cents/share

10.

Earnings per share

           
  Attributable and headline earnings per share
The calculation of attributable and headline earnings per share is based on a weighted average of 198 995 686 (2007: 200 461 258) ordinary shares.
The calculation is reconciled as follows:
           
  Profit attributable to the equity holders of the parent 1 314,1 1 314,1 660,3 1 049,9 1 049,9 523,7
  Adjustments after minorities:            
    Loss on disposal of movable assets 3,8 1,7 0,9 0,8 0,7 0,4
    Impairment of assets 4,7 3,6 1,8 26,3 24,1 12,0
    CGT on treasury shares 2,4 2,4 1,2
    Loss on disposal of Furnex 6,2 6,2 3,1
  Headline earnings 1 322,6 1 319,4 663,0 1 085,6 1 083,3 540,4
  IFRS 2 BEE transaction charge 89,6 89,6 45,0 63,2 63,2 31,5
  Headline earnings before the BEE transaction 1 412,2 1 409,0 708,0 1 148,8 1 146,5 571,9
               
        2008 2007 2008 2007
        Rm Rm Cents/share Cents/share
  Diluted attributable and diluted headline earnings per share        
  The calculation of diluted attributable and diluted headline earnings per share is based on a weighted average of 203 866 583 (2007: 204 037 431) ordinary shares.
The calculation is reconciled as follows:
       
    Profit attributable to the equity holders of the parent 1 314,1 1 049,9 660,3 523,8
    Adjustment for impact of issuing ordinary shares (15,7) (9,3)
  Diluted attributable earnings 1 314,1 1 049,9 644,6 514,5
  Headline earnings 1 319,4 1 083,3 663,0 540,4
    Adjustment for impact of issuing ordinary shares (15,8) (9,5)
  Diluted headline earnings 1 319,4 1 083,3 647,2 530,9
               
            2008 2007
  Weighted average shares outstanding No of shares No of shares
  Weighted average shares outstanding for basic and headline earnings per share 198 995 686 200 461 258
  Potentially dilutive ordinary shares resulting from outstanding options 4 870 897 3 576 173
  Weighted average shares outstanding for diluted and diluted headline earnings per share 203 866 583 204 037 431