notes to the COMPANY annual financial statements for the year ended 23 December 2012

11. Notes to the cash flow statement

  December 2012
Rm
  June 2012
Rm
11.1 Cash inflow/(outflow) from trading       
Profit before taxation  482.5    829.5 
Adjustment for:       
Finance expense  1.6    (1.1)
Finance income  (1.5)  
Dividends received  (474.8)   (946.5)
Share-based payment expense  3.6    4.0 
Other non-cash movements  0.4    1.4 
  11.8    (112.7)
11.2 Working capital movements       
Decrease in trade and other payables  (4.7)   (2.2)
Increase in trade and other receivables  (11.0)  
  (15.7)   (2.2)
11.3 Taxation paid       
Amounts (owing)/due at the beginning of the year  (0.6)   3.3 
Amounts charged to the income statement  (0.5)   (72.2)
Deferred taxation  0.1    2.6 
Amounts owing at the end of the year  0.9    0.6 
Cash amounts paid  (0.1)   (65.7)
       
11.4 Dividends paid       
Cash dividends paid to shareholders  (330.3)   (873.0)
       
11.5 Other investing activities       
Other financial assets  (0.5)   (0.8)
  (0.5)   (0.8)
11.6 Net acquisition of treasury shares       
Share trust losses  (72.6)   (127.0)
  (72.6)   (127.0)

12. Related parties

  Dividends
received
Rm
  Management
Fees
received
Rm
  Interest
received
Rm 
  Dividends 
paid 
Rm 
  Interest
paid
Rm
Loans to and from related parties are disclosed in note 5 in the Company Financial Statements.                  
                   
December 2012                   
Income statement transactions between related parties are as follows                   
-Massbuild (Proprietary) Limited  272.4         
-Masscash Wholesale  200.0         
-Game Discount World (Mozambique) 1.5         
-Masstores (Proprietary) Limited    8.2       
-Massmart Management & Finance Company (Proprietary) Limited      1.1      1.6 
-Massmart Black Scarce Skills Trust 0.9         
-Main Street 830 (Proprietary) Ltd        166.2   
-The Massmart Thuthukani Empowerment Trust        14.7   
  474.8    8.2    1.1    180.9    1.6 
June 2012                   
Income statement transactions between related parties are as follows                   
-Massbuild (Proprietary) Limited  251.6         
-Masscash Wholesale  50.7         
-Game Discount World (Mozambique)        
-Masstores (Proprietary) Limited  600.0    20.0       
-Massmart Management & Finance Company (Proprietary) Limited      0.7     
-Main Street 830 (Proprietary) Ltd        439.5   
-The Massmart Thuthukani Empowerment Trust  44.2        40.2   
  946.5    20.0    0.7    479.7   

  • Refer to Note 1 in the Company Financial Statements for dividends and management fees received.
  • Refer to Note 3 in the Company Financial Statements for interest received and paid.
  • Refer to Note 34 and 35 in the Group Financial Statements in regards to Directors' emoluments and interest of Directors in the Company's share scheme.

13. Financial instruments

Capital risk management 

The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balances.

The capital structure of the Company consists of equity attributable to equity holders of the parent, comprising share capital, share premium, other reserves and retained profit.

The targeted level of gearing is determined after consideration of the following key factors: 

  • the needs of the Company to fund current and future capital expenditure to achieve its stated production growth target; and 
  • the desire of the Company to maintain its gearing within levels considered to be acceptable taking into account potential business and position of the Company in the business cycle. 

Significant accounting policies

Details of significant accounting policies, including the recognition criteria, the basis for measurement and the basis on which income and expenses are recognised, in respect of each category of financial asset, financial liability and equity instrument, are disclosed under the note 1 of the Group Financial Statements. 

Categories of financial instruments 

Fair values of financial instruments

All financial instruments have been classified according to the relevant IAS 39 Financial Instruments: Recognition and Measurement category. There is no difference between their fair value and carrying value and they are accounted for as follows: 

Financial assets 

Fair value through profit or loss (FVTPL)
These are held at fair value and any adjustments to fair value are taken to the statement of comprehensive income. Listed investments are carried at market value by reference to stock exchange quoted selling prices. 

Loans and receivables 
These are held at amortised cost less any impairment losses recognised to reflect irrecoverable amounts. 

Held-to-maturity investments 
These are held at amortised cost less any impairment losses recognised to reflect irrecoverable amounts. 

Available-for-sale investments 
These are held at fair value and any adjustment to fair value is recognised in other comprehensive income. 

Financial liabilities 

Amortised cost 
Financial liabilities held as non-trading liabilities and are shown at amortised cost. 

Fair value through profit or loss (FVTPL)
These are held at fair value and any adjustments to fair value are taken to the statement of comprehensive income. Listed investments are carried at market value by reference to stock exchange quoted selling prices.

  Total
Rm
  Non-
financial
instrument
Rm
  Financial
instrument
Rm
  FVTPL
Rm
  Liability at
amortised
cost
Rm
  Loans and
receivables
Rm
  Held-to-
maturity
investments
Rm
  Available-
for-sale
financial
assets
Rm
December 2012                               
Non-current assets                               
Investment in subsidiaries  469.9    469.9             
Other financial assets  5.8      5.8        5.1      0.7 
Unlisted investments  5.1      5.1        5.1     
Listed investments  0.7      0.7            0.7 
Current assets                               
Trade and other receivables  11.0      11.0        11.0     
Amounts owing by subsidiaries  1,577.5      1,577.5        1,577.5     
Cash and bank balances  7.6      7.6        7.6     
Total assets  2,071.8    469.9    1,601.9        1,601.2      0.7 
Non-current liabilities                               
Deferred taxation  0.2    0.2             
Current liabilities                               
Trade and other payables  17.4    1.2    16.2      16.2       
Taxation  0.9    0.9             
Amounts owing to subsidiaries  500.6      500.6      500.6       
Total liabilities  519.1    2.3    516.8      516.8       
                               
  Total
Rm
  Non-
financial
instrument
Rm
  Financial
instrument
Rm
  FVTPL
Rm
  Liability at
amortised
cost
Rm
  Loans and
receivables
Rm
  Held-to-
maturity
investments
Rm
  Available-
for-sale
financial
assets
Rm
June 2012                               
Non-current assets                               
Investment in subsidiaries  469.9    469.9             
Other financial assets  5.3      5.3        4.8      0.5 
Unlisted investments  4.8      4.8        4.8     
Listed investments  0.5      0.5            0.5 
Current assets                               
Trade and other receivables               
Amounts owing by subsidiaries  1,583.6      1,583.6        1,583.6     
Cash and bank balances  7.8      7.8        7.8     
Total assets  2,066.6    469.9    1,596.7        1,596.2      0.5 
Non-current liabilities                               
Deferred taxation  0.1    0.1             
Current liabilities                               
Trade and other payables  22.1    4.8    17.3      17.3       
Taxation  0.6    0.6             
Amounts owing to subsidiaries  575.7      575.7      575.7       
Total liabilities  598.5    5.5    593.0      593.0       


Financial risk management¬† 

The company does not trade in financial instruments, but in the ordinary course of business operations, the company is exposed to a variety of financial risks arising from the use of financial instruments. These risks include: 

  • market risk (comprising interest rate risk, currency risk and other price risk); 
  • liquidity risk; and
  • credit risk.

The company has developed a comprehensive risk management process to facilitate, control and monitor these risks. This process includes formal documentation of policies, including limits, controls and reporting structures. The Executive Committee is responsible for risk management activities within the company. 

Market risk management 

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The market risks that the company is primarily exposed to include currency risk, interest rate risk, and other price risk. Market risk is managed by identifying and quantifying risks on the basis of current and future expectations and ensuring that all trading occurs within defined parameters. This involves the review and implementation of methodologies to reduce risk exposure. The reporting on the state of the risk and risk practices to executive management is part of this process. The processes set up to measure, monitor and mitigate these market risks are described below. There has been no change to the company’s exposure to market risk or the manner in which it manages and measures the risk since the prior period. 

Interest rate management 

The Company is exposed to interest rate risk because it borrows and invests surplus funds with Massmart Management and Finance (Proprietary) Limited to fund its operations. This interest rate risk is managed by floating rate borrowings by Massmart Management and Finance (Proprietary) Limited. The Company is exposed to interest rate risk through these borrowings.

The carrying amount of the company's financial assets and liabilities at reporting date that are subject to interest rate risk is as follows: 

  Subject to interest rate movement   Non-interest
bearing
  Total
  Fixed
Rm
  Floating
Rm
  Rm   Rm
December 2012               
Financial assets               
Other financial assets      5.8    5.8 
Unlisted investments      5.1    5.1 
Listed investments      0.7    0.7 
Trade, other receivables and prepayments      11.0    11.0 
Amounts owing by subsidiaries      1,577.5    1,577.5 
Cash and bank balances    7.6      7.6 
Total financial assets    7.6    1,594.3    1,601.9 
Financial liabilities               
Trade and other payables      16.2    16.2 
Amounts owing to subsidiaries    48.4    452.2    500.6 
Total financial liabilities    48.4    468.4    516.8 
               
  Subject to interest rate movement   Non-interest
bearing
  Total
  Fixed
Rm
  Floating
Rm
  Rm   Rm
June 2012               
               
Financial assets               
Other financial assets      5.3    5.3 
Unlisted investments      4.8    4.8 
Listed investments      0.5    0.5 
Trade, other receivables and prepayments       
Amounts owing by subsidiaries      1,583.6    1,583.6 
Cash and bank balances    7.8      7.8 
Total financial assets    7.8    1,588.9    1,596.7 
               
Financial liabilities               
Trade and other payables      17.3    17.3 
Amounts owing to subsidiaries    106.8    468.9    575.7 
Total financial liabilities    106.8    486.2    593.0 


Interest rate sensitivity

The Company is sensitive to the movements in the SA Prime interest rate. The rates of sensitivity represents management's assessment of the possible change in interest rates. The average interest rate for the Company for the year was 5.86% (June 2012: 6.25%). If the SA Prime interest rate increased and decreased by 50 average basis points (June 2012: increased and decreased by 50 average basis points) at year-end, the income for the year would have decreased and increased by less than R1 million respectively (June 2012: decreased and increased by less than R1 million respectively).

Liquidity risk management 

Liquidity risk is the risk that the company will be unable to meet a financial commitment in any location or currency. This risk is minimised through the holding of cash balances and sufficient available borrowing facilities. In addition, detailed cash flow forecasts are regularly prepared and reviewed so that the cash needs of the company are managed according to its requirements. 

The following table details the company's contractual maturity for its non-derivative financial liabilities. The table has been compiled based on the undiscounted cash flows of financial liabilities based on the earliest date on which the company can be required to repay the liability. The cash flows include both the principal and interest payments. 

  Repayable
within 1 year
Rm
  Repayable
2 - 5 years
Rm
  Total
Rm
December 2012           
Financial liabilities           
Trade and other payables  16.2      16.2 
Amounts owing to subsidiaries  500.6      500.6 
Total undiscounted cash flows of the company's financial liabilities  516.8      516.8 
Less: Future finance charges         
Total financial liabilities          516.8 
June 2012           
Financial liabilities           
Trade and other payables  17.3      17.3 
Amounts owing to subsidiaries  575.7      575.7 
Total undiscounted cash flows of the company's financial liabilities  593.0      593.0 
Less: Future finance charges         
Total financial liabilities          593.0 


Credit risk management 

Potential areas of credit risk include trade receivable, amounts owing by subsidiaries and short-term cash investments. Credit risk arises from the risk that a counterparty may default or not meet its obligations timeously. At the year-end management did not consider there to be any material credit risk exposure.

The carrying amount of the financial assets represents the Company's maximum exposure to credit risk without taking into consideration any collateral provided :

  Maximum credit risk 
  December 2012
Rm
  June 2012
Rm
Financial assets and other credit exposures       
Unlisted investments  5.1    4.8 
Trade receivables  11.0   
Amounts owing by subsidiaries  1,577.5    1,583.6 
Cash and bank balances  7.6    7.8 
  1,601.2    1,596.2 


Currency risk management 

The carrying amount of the Company's foreign currency denominated monetary assets at reporting date is as follows : 

  South African
rand
Rm
  Euro
Rm
  GBP
Rm
  Total
Rm
December 2012               
Loans and receivables               
Other financial assets  0.9      4.9    5.8 
Trade receivables  11.0        11.0 
Amounts owing by subsidiaries  1,577.3    0.2      1,577.5 
Cash and bank balances  7.6        7.6 
  1,596.8    0.2    4.9    1,601.9 
June 2012               
Loans and receivables               
Other financial assets  0.7      4.6    5.3 
Trade receivables       
Amounts owing by subsidiaries  1,583.4    0.2      1,583.6 
Cash and bank balances  7.8        7.8 
  1,591.9    0.2    4.6    1,596.7 

 
Foreign currency sensitivity 

The company is sensitive to the movements in the British Pound. The rates of sensitivity represents management's assessment of the possible change in currency rates. If the British Pound currency rate increased and decreased by 5% (June 2012: increased by 5%) at year-end, the income for the year would have decreased and increased by less than R1 million respectively (June 2012: decreased and increased by less than R1 million respectively).