Massmart Annual Report 2008

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

11.

Property, plant and equipment



Click here to view complete table in html

    2008 2007
    Rm Rm

12.

Goodwill

   
  Reconciliation of goodwill:    
  At the beginning of the year 1 346,8 1 196,4
  Additions 14,5 163,7
  Impairment (12,2)
  Exchange differences 1,0 (1,1)
  At the end of the year 1 362,3 1 346,8
  Goodwill acquired in a business combination is allocated, at acquisition, to the cash-generating units (CGUs) that are expected to benefit from that business combination. Before recognition of impairment losses, the carrying amount of significant goodwill had been allocated as follows:    
  Jumbo Cash & Carry (Pty) Ltd and Browns & Weirs Cash & Carry Holdings (Pty) Ltd 243,0
  CCW Wholesalers (Pty) Ltd 203,4
  Masscash Holdings (Pty) Ltd 493,7
  Builders Warehouse (a division of Masstores (Pty) Ltd) 187,5 187,5
  Federated Timbers (Pty) Ltd 336,9 336,9
  De La Rey 1001 Building Materials (Pty) Ltd 223,4 223,4
 

Jumbo Cash & Carry (Pty) Ltd and Browns & Weirs Cash & Carry (Pty) Ltd, and CCW Wholesalers (Pty) Ltd do not have goodwill balances at year-end as there is a reallocation of their goodwill to Masscash Holdings (Pty) Ltd.

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. When testing goodwill for impairment, the recoverable amounts of the CGUs are determined as the lower of value in use and fair value less costs to sell. The key assumptions for the value-in-use calculations are discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimates discount rates using rates that reflect current market assumptions of the time value of money and the risks specific to the CGUs. The growth rates are based on industry growth forecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.

The Group prepares cash flow forecasts based on the CGUs’ June 2008 results for the next five years. A terminal value is calculated based on an estimated growth rate of 3%. This rate does not exceed the average long-term growth rate for the relevant markets.

The rate used to discount the forecast cash flows is 14%.

The 2008 additions relate to minor business acquisitions in the Masscash division. In the prior year, the buyout of the minorities in De La Rey 1001 Building Materials (Pty) Ltd makes up the significant portion of the additions.

In the prior year, Jumbo Cash & Carry (Pty) Ltd recognised a goodwill impairment of R12,2 million arising from a minor acquisition in 2001.

            Cost/carrying Accumulated Net book
            value amortisation value
            Rm Rm Rm

13.

Other intangible assets

     
  2008      
  Owned assets      
     Computer software 292,1 162,9 129,2
     Trademarks 4,3 1,5 2,8
  Total 296,4 164,4 132,0
  2007      
  Owned assets      
     Computer software 243,4 116,0 127,4
     Trademarks 3,0 0,2 2,8
  Total 246,4 116,2 130,2
                 
    Opening net
book value
Additions Disposals Foreign
exchange
Amortisation
gain Impairments Closing net
book value
    Rm Rm Rm Rm Rm Rm Rm
  Reconciliation of other intangible assets              
  2008              
  Owned assets              
    Computer software 127,4 54,1 (0,5) (48,0) (3,8) 129,2
    Trademarks 2,8 1,3 (0,4) (0,9) 2,8
  Total 130,2 55,4 (0,5) (48,4) (4,7) 132,0
  2007              
  Owned assets              
    Computer software 100,3 63,6 (0,4) (38,2) 2,1 127,4
    Trademarks 2,0 1,0 (0,2) 2,8
  Total 102,3 64,6 (0,4) (38,4) 2,1 130,2
  Intangible assets are amortised over the estimated useful life of the asset, which, on average, is three years for computer software and ten years for trademarks.
      2008 2007
      Rm Rm

14.

 Investments

   
  Investment in associate    
  Share of post-acquisition profit, net of dividend received 0,6 0,5
  Amounts owing to associate 0,8 0,2
    1,4 0,7
  Details of the Group’s associate at 30 June 2008 are as follows:    
    Name of associate Clidet No 484 (Pty) Ltd    
    Place of incorporation and operation South Africa    
    Proportion of ownership interest 33,3%    
    Proportion of voting power held 33,3%    
    Principal activity Investment property    
  33,3% of the R100 share capital was purchased for R33. The financial reporting date for Clidet    
  No 484 (Pty) Ltd is 30 June.    
  Summarised financial information in respect of the Group’s associate is set out below:    
  Total assets 31,3 31,6
  Total liabilities 29,3 30,1
  Net assets 2,0 1,5
  Group’s share of associate’s net assets 0,7 0,7
  Revenue 5,4 5,4
  Profit for the year 0,5 1,0
  Group’s share of associate’s profit for the year has been included in ‘Other operating costs’ in the consolidated income statement. 0,2 0,3
  Unlisted investments    
  Fair value through profit or loss (FVTPL)    
  Held-for-trading    
  Bare dominium revaluation relating to certain Makro properties 45,2 38,9
  Investment in offshore trading structure 243,2 168,2
  Total financial assets classified as held for trading 288,4 207,1
  Designated as at FVTPL    
  Conditional right to cell-captive distribution 5,9 2,3
  Total financial assets designated as at FVTPL 5,9 2,3
  Total fair value through profit or loss (FVTPL) 294,3 209,4
  Loans and receivables    
  Trencor export partnership 4,1 4,6
  Total loans and receivables 4,1 4,6
  Held-to-maturity investments carried at amortised cost    
  Preference share investment 560,7 485,3
  Offset of related long-term liability (549,5) (459,3)
  Other investments 0,1 0,3
  Total held-to-maturity investments 11,3 26,3
  Total unlisted investments 309,7 240,3
  Listed investments    
  Other investments 0,2 0,2
      0,2 0,2
  Total investments 311,3 241,2
         
  Reconciliation of financial assets carried at fair value through profit or loss (FVTPL)    
  Opening balance 209,4 149,4
  Fair value adjustments taken to the income statement 57,6 61,1
  Foreign exchange adjustment taken to the income statement 27,3 (1,1)
  Closing balance 294,3 209,4
  Reconciliation of loans and receivables    
  Opening balance 4,6 4,9
  Investment realised (0,5) (0,3)
  Closing balance 4,1 4,6
  This represents our participation in a Trencor import/export partnership.    
  Reconciliation of held-to-maturity investments    
  Opening balance 26,3 36,3
  Amortisation taken to the income statement (15,0) (10,0)
  Closing balance 11,3 26,3
  The preference share investment represents cumulative preference shares in Fullimput 65 (Pty) Limited. A long-term liability of the Group is secured by a cession of the preference shares and legal offset is permitted.    
  Reconciliation of available-for-sale investments    
  Opening balance
  Deconsolidation of Makro Zimbabwe 13,2
  Fair value adjustment of investment in Makro Zimbabwe (13,2)
  Closing balance
 

Makro Zimbabwe was deconsolidated in the prior year and the investment has been carried as an available-for-sale financial asset. At the prior year-end, the fair value of this asset has been determined to be zero and the adjustment taken to equity as a reserve.

 

The directors value the unlisted investments, net of the offset of the related long-term liability, at R309,7 million (2007: R240,3 million).

For IAS 39 Financial Instruments: Recognition and Measurement accounting treatment of these investments, see note 37, “Financial instruments”.

15.

Other financial assets

  Housing loans to the directors and Executive Committee members of Massmart Holdings Limited:    
    Balance at the beginning of the year   0,3 1,9
    Advanced during the year  
    Repayments   (1,6)
  Balance at the end of the year 0,3 0,3
  Employee share trust loans to the directors and Executive Committee members of Massmart    
  Holdings Limited:    
    Balance at the beginning of the year 127,1 144,5
    Advanced during the year 58,9 32,8
    Repayments (11,6) (50,2)
  Balance at the end of the year 174,4 127,1
  Other employee loans:    
    Housing and staff loans 3,3 5,2
    Employee share trust loans 0,8 1,5
  Finance lease deposit 45,1 39,3
  Other loans 2,8
        52,0 46,0
        226,7 173,4
 

These loans are classified as ‘Loans and receivables’ for IAS 39 Financial Instruments: Recognition and Measurement purposes. See note 37, ‘Financial instruments’, for IAS 39 accounting treatment.

All housing and staff loans, including loans to directors, bear interest at various rates below the prime interest rate. The loans to the employee share trust particpants, including executive directors, attract interest of zero percent and are secured by the underlying shares. The finance lease deposit accrues interest at 13,6%.

Detailed housing and employee share trust loans to the directors and Executive Committee members of Massmart Holdings Limited:

               Other Executive
    Lamberti, MJ* Pattison, GM Hayward, GRC Committee
    Rm Rm Rm Rm
  2008        
  Balance at the beginning of the year 48,5 17,4 61,5
  Advanced during the year 8,3 8,9 41,7
  Repayments (4,3) (1,4) (5,9)
  Balance at the end of the year 52,5 24,9 97,3
  2007        
  Balance at the beginning of the year 31,5 45,3 20,0 49,6
  Advanced during the year 0,8 6,9 0,7 24,4
  Repayments (32,3) (3,7) (3,3) (12,5)
  Balance at the end of the year 48,5 17,4 61,5
  * Resigned as executive director on 30 June 2007 and appointed non-executive Chairman on 1 July 2007.
   
              2008 2007
              Rm Rm

16.

Deferred taxation

   
  The movements during the year are analysed as follows:    
    Net asset at the beginning of the year 317,3 312,3
    Charge to profit or loss for the year (44,3) 3,1
    Debit to equity 0,3 1,9
  Net asset at the end of the year 273,3 317,3
    Deferred taxation balances are presented in the balance sheet as follows:    
    Deferred taxation assets 415,2 432,8
    Deferred taxation liabilities (141,9) (115,5)
              273,3 317,3
                 
      Opening
balance
Charged to
income
Charged to
equity
Exchange
differences
Changes in
tax rate
Closing
balance
      Rm Rm Rm Rm Rm Rm
  2008            
  Temporary differences            
    Trademarks 9,2 (7,5) (0,3) 1,4
    Assessed loss unutilised 45,4 (12,3) 4,0 (0,6) 36,5
    Export partnerships (5,1) 0,5 0,2 (4,4)
    Debtors provisions 18,0 (7,0) (0,6) 10,4
    Prepayments (87,1) (22,9) 3,0 (107,0)
    Creditors provisions 59,8 1,3 0,4 (1,7) 59,8
    Property, plant and equipment (22,8) (6,4) (0,2) 0,6 (28,8)
    Finance leases 14,6 (0,9) (0,5) 13,2
    Long-term provisions 13,9 0,6 (0,5) 14,0
    Income not accrued (0,2) (0,4) (0,6)
    Deferred income 56,0 11,8 0,1 (1,9) 66,0
    Operating lease adjustment 223,8 11,6 0,3 (7,3) 228,4
    Other temporary differences (8,2) (7,2) 0,3 (0,1) (0,4) (15,6)
  Total 317,3 (38,8) 0,3 4,5 (10,0) 273,3
  2007            
  Temporary differences            
    Trademarks 18,1 (8,9) 9,2
    Assessed loss unutilised 47,8 (3,3) 0,9 45,4
    Export partnerships (5,4) 0,3 (5,1)
    Debtors provisions 21,6 (3,4) (0,2) 18,0
    Prepayments (75,3) (11,8) (87,1)
    Creditors provisions 52,2 7,6 59,8
    Property, plant and equipment (20,4) (4,6) 2,2 (22,8)
    Finance leases 15,3 (0,7) 14,6
    Long-term provisions 12,6 1,3 13,9
    Income not accrued (0,2) (0,2) 0,2 (0,2)
    Deferred income 45,5 10,5 56,0
    Operating lease adjustment 214,0 10,3 (0,4) (0,1) 223,8
    Other temporary differences (13,5) 5,7 (0,5) 0,1 (8,2)
  Total 312,3 2,8 1,9 0,6 (0,3) 317,3
                 
              2008 2007
              Rm Rm

17.

Inventories

   
  Food    
    Inventory at cost 1 526,5 1 094,2
    Provisions (56,9) (54,6)
              1 469,6 1 039,6
  Liquor    
    Inventory at cost 261,4 176,0
    Provisions (8,5) (4,9)
              252,9 171,1
  General merchandise    
    Inventory at cost 2 410,1 2 196,4
    Provisions (226,4) (209,1)
              2 183,7 1 987,3
  Home improvements    
    Inventory at cost 968,6 925,7
    Provisions (116,2) (96,4)
              852,4 829,3
  Total inventory net of provisions 4 758,6 4 027,3
  Inventories are carried at the lower of cost or net realisable value.    
  Carrying amount of inventories carried at net realisable value 109,8 13,6
  Inventory write-down recognised as an expense 8,4 38,5
  Inventory is fully funded by trade payables. Details of trade payables can be found in note 25.
       
              2008 2007
              Rm Rm

18.

Trade receivables and prepayments

   
  Trade receivables 1 134,7 1 073,2
  Allowance for doubtful debts (60,0) (92,4)
              1 074,7 980,8
  Net consumer accounts receivable 283,4
  Prepayments 50,9 27,8
  Other accounts receivable 638,6 584,5
              1 764,2 1 876,5
  Movement in allowance for doubtful debts    
  Balance at the beginning of the year 92,4 80,3
  (Decrease)/increase in allowance recognised in profit or loss (32,4) 12,1
  Balance at the end of the year 60,0 92,4
 

The net consumer accounts receivable balance for the current year is zero due to the sale of Massdiscounters retail debtors book. Refer to note 19 for further details.

Trade receivables are classified as ‘Loans and receivables’ for IAS 39 Financial Instruments: Recognition and Measurement purposes. See note 37, ‘Financial instruments’ for IAS 39 accounting treatment.

No interest is charged on the trade receivables for the first 30 days from the date of the invoice. Thereafter, differing structures exist between the Divisions with interest being charged between 12,5% and 26,0% per annum on the outstanding balance (the 26,0% relates to Massdiscounters consumer accounts receivable which is now classified as an asset held for sale). Trade receivables between 30 days and 180 days are provided for based on estimated irrecoverable amounts from the sale of goods, determined by reference to past default experience. It is the Group’s policy to provide fully for all receivables that are past due because historical experience is such that these receivables are generally not recoverable.

Before accepting any new customer, the Group uses an external credit scoring system to assess the potential customer’s credit quality and defines credit limits by customer. Limits and scoring attributed to customers are reviewed quarterly to once a year. There is no customer who represents more than 5% of the total balance of trade receivables.

Included in the Group’s trade receivables balance are debtors with a carrying amount of R7,4 million which are past due at the reporting date for which the Group has not provided. The Group considers the amounts recoverable and currently holds security over these debtors. The average age of these receivables is 200 days.

In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for doubtful debts.

Included in the allowance for doubtful debts are specific trade receivables with a balance of R0,5 million which have been placed under liquidation. This represents the difference between the carrying amount of the specific trade receivable and the present value of the expected liquidation proceeds.

              2008 2007
              Rm Rm

19.

Assets classified as held for sale

   
  Massmart has contractually concluded the cash sale of the Massdiscounters retail debtors book with effect from the first day of business in the 2009 financial year.

The classes of assets comprising the operations classified as held-for-sale at the balance sheet date are as follows:
   
  Trade receivables 167,5
  Computer hardware 0,1
              167,6
    Share capital Share premium
    2008 2007 2008 2007
    Rm Rm Rm Rm

20.

Issued capital

       
  Authorised        
  500 000 000 (2007: 500 000 000) ordinary shares of 1 cent each 5,0 5,0
  20 000 000 (2007: 20 000 000) non-redeemable cumulative non-participating preference shares of 1 cent each 0,2 0,2
  18 000 000 (2007: 18 000 000) ‘A’ convertible redeemable non-cumulative participating preference shares of 1 cent each 0,2 0,2
  2 000 000 (2007: 2 000 000) ‘B’ convertible redeemable non-cumulative participating preference shares of 1 cent each
  Issued        
  201 193 512 (2007: 201 072 831) ordinary shares of 1 cent each 2,0 2,0 151,7 254,7
  17 868 125 (2007: 17 967 866) ‘A’ convertible redeemable non-cumulative participating preference shares of 1 cent each
  1 979 060 (2007: 2 000 000) ‘B’ convertible redeemable non-cumulative participating preference shares of 1 cent each
           
      Number of Share capital Share premium
      shares Rm Rm
  Ordinary shares      
  Balance at the beginning of the previous year 201 040 697* 2,0 262,6
  Shares issued in terms of the Massmart Thuthukani Empowerment Trust 32 134 (4,5)
  Ordinary shares issued – June 2007 201 072 831 2,0 258,1
  Treasury shares (265 720) (3,4)
  Ordinary shares issued excluding treasury shares – June 2007 200 807 111 2,0 254,7
  Balance at the beginning of the year 201 072 831* 2,0 254,7
  Shares issued in terms of the Massmart Black Scarce Skills Trust 20 940
  Shares issued in terms of the Massmart Thuthukani Empowerment Trust 99 741
  Ordinary shares issued – June 2008 201 193 512 2,0 254,7
  Treasury shares (2 000 984) (103,0)
  Ordinary shares issued excluding treasury shares – June 2008 199 192 528 2,0 151,7
* The number of shares is before treasury shares.      
  Ordinary shares, which have a par value of 1 cent, carry one vote per share and carry the right to dividends.      
  ‘A’ convertible redeemable non-cumulative participating preference shares      
  Balance at the beginning of the previous year
  Shares issued in terms of the Massmart BEE transaction 18 000 000 0,2
  Shares converted to ordinary shares (32 134)
  Treasury shares (17 967 866) (0,2)
  Balance at 30 June 2007
  Balance at the beginning of the year
  Net shares issued in terms of the Massmart BEE transaction in prior year 17 967 866
  Shares converted to ordinary shares (99 741)
  Treasury shares (17 868 125)
  Balance at 30 June 2008
  ‘A’ convertible redeemable non-cumulative participating preference shares, which have a par value of 1 cent, are held in the Thuthukani Empowerment Trust. These shares carry one vote per share, which is cast by the appointed trustees, and carry the right to dividends. On election of the beneficiary, the shares will convert to ordinary shares on a one-for-one basis and will rank pari passu with all ordinary shares then in issue.
   
  ‘B’ convertible redeemable non-cumulative participating preference shares      
  Balance at the beginning of the previous year
  Shares issued in terms of the Massmart BEE transaction 2 000 000
  Treasury shares (2 000 000)
  Balance at 30 June 2007
  Balance at the beginning of the year
  Net shares issued in terms of the Massmart BEE transaction in prior year 2 000 000
  Shares converted to ordinary shares (20 940)
  Treasury shares (1 979 060)
  Balance at 30 June 2008
  ‘B’ convertible redeemable non-cumulative participating preference shares, which have a par value of 1 cent, are held in the Black Scarce Skills Trust. These shares carry one vote per share, which is cast by the trustees, and do not carry the right to dividends. On election of the beneficiary, the shares will convert to ordinary shares on a one-for-one basis and will rank pari passu with all ordinary shares then in issue.
  Share options granted under the Massmart Holdings Limited Employee Share Trust

As at June 2008, executives and senior employees have options over 14 304 900 ordinary shares (of which 11 784 413 are unvested). As at June 2007, executives and senior employees have options over 10 239 002 ordinary shares (of which 7 217 626 are unvested).

Share options granted under the Employee Share Incentive Scheme carry no rights to dividends and no voting rights. Further details of the Employee Share Incentive Scheme are contained in note 27 to the financial statements.

The total share buyback (including shares bought in the market by the Share Trust) for the year was 3,3 million shares (2007: 4,4 million) at an average price of R83,10 (2007: R71,85) totalling R271,8 million (2007: R313,2 million).

The directors have the authority, until the next annual general meeting, to issue the ordinary shares of the Company up to a maximum of 5% of the shares already issued.

The directors have the authority, until the next annual general meeting, to issue the non-redeemable cumulative non-participating preference shares of the Company.