Condensed interim unaudited financial statements

   NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PREPARATION

The unaudited consolidated financial statements have been prepared in accordance with and contain the information required by the International Financial Reporting Standards (IFRS) and its interpretations adopted by the International Accounting Standards Board (IASB) in issue and effective for the group at 31 December 2018 and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council. The results are presented in accordance with IAS 34 – Interim Financial Reporting and comply with the Listings Requirements of the Johannesburg Stock Exchange Limited and the Companies Act of South Africa, 2008. These unaudited condensed consolidated financial statements do not include all the information required for full annual financial statements and should be read in conjunction with the consolidated annual financial statements as at and for the year ended 30 June 2018.

These unaudited condensed consolidated financial statements have been prepared under the supervision of Mr OJ Janse Van Rensburg, CA(SA) and were approved by the board of directors on 25 February 2019.

2. ACCOUNTING POLICIES

The accounting policies adopted and methods of computation used in the preparation of the unaudited condensed consolidated financial statements are in accordance with IFRS and are consistent with those of the annual financial statements for the year ended 30 June 2018, with the exception of new policies as required by new and revised International Financial Reporting Standards issued and in effect.

3. ADOPTION OF STANDARDS ISSUED AND EFFECTIVE AND RESTATEMENT OF PRIOR PERIODS

International Financial Reporting Standards that have become applicable to Motus for the 2019 financial year include IFRS 9 – Financial Instruments and IFRS 15 – Revenue from Contracts with Customers (both standards are effective for Motus from 1 July 2018).

IFRS 9 – Financial Instruments

The standard requires that impairment provisions for receivables are to be calculated on an expected loss basis rather than incurred loss basis. This is mainly effective in our Motus Financial Services segment, where the banks are now required to accelerate their provision for bad debts on non-arrear portfolios resulting in lower impairments when the loans become irrecoverable. This has a minor impact on the results of the profit share arrangements that Motus has with the banks. The change from the incurred loss to the expected loss model will also apply to other receivables within the group and due to the credit policy in place for sales to external customers the impact is minor.

The standard has also resulted in a more simplified approach to hedge accounting which affects the Motus Import and Distribution segment.

The application of IFRS 9 had no material impact on amounts reported in respect of the group’s financial assets and financial liabilities. However, there is a requirement for increased disclosure.

IFRS 15 – Revenue from Contracts with Customers

A detailed review of the potential impact of IFRS 15 has been finalised. All material contracts have been assessed for any impact in terms of the five-step approach. The only change that this review resulted in, was a change to the application of the principal and agency decision processes in the recognition of revenue. As a retailer, the nature of the sales process is that transactions are completed in a short space of time and so the impact of the new accounting standard would be expected to be minor.

Under the previous accounting standard (IAS 18 – Revenue Recognition) one of the indicators relating to the principal and agency decision processes was who took on the credit risk. In terms of the agreements with certain of the suppliers in the Aftermarket Parts division, one of the entities agreed to carry the credit risk and reimburse the suppliers in the event of default. As this was seen as an unusual practise in the industry, it was agreed in that entity to treat the accounting as a principle arrangement and recognise the revenue accordingly.

Under the new accounting standard, IFRS 15, credit risk is no longer an indicator, requiring that the transactions are now accounted for on the basis of an agency relationship.

The restatement had no impact on profits, cash flows and the financial position, it only affected revenue and net operating expenses as detailed below. Due to there being no impact on the statement of financial position, an additional statement of financial position was not disclosed.

Statement of profit or loss 2018 HY1 
Rm 
  2018 FY 
Rm 
 
Revenue decrease (326)   (658)  
Net operating expenses 326    658   
Profit from operations before depreciation and recoupments (no impact) –    –   

4. NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS IN ISSUE BUT NOT YET EFFECTIVE

International Financial Reporting Standards that will become applicable to the group in future reporting periods is IFRS 16 – Leases (effective for Motus from 1 July 2019). Details of these standards were outlined in the 30 June 2018 annual financial statements. An update of the group’s assessment of the potential impacts of the new standards on the group’s financial statements is as follows:

Based on an assessment of operating leases that would be raised as assets and liabilities relating to 30 June 2018, adopting IFRS 16 would have the following indicative impact, with the Retail and Rental segment being the main contributor.

As at 30 June 2018 the right of use asset for the leases would amount to R1 828 million. This balance is the take-on balance at inception of the leases being the present value of the minimum lease payments less the amortisation to 30 June 2018. The related lease liability would amount to R2 074 million being the present value of the minimum lease payments plus the related interest less the rental payments to 30 June 2018. The difference between the asset and the liability would be adjusted to retained income.

In total, operating expenses would decrease due to a reduced rental expense partially offset by an increased amortisation on the right of use asset. Interest would be increased by the interest on the lease liability. The impact on net profit before tax would be minor.

5. EXCHANGE RATES

  Closing rates     Average rates    
  December
2018
  June
2018
December
2017
  December
2018
  June
2018
December
2017
 
US Dollar 14,39   13,71 12,31   14,17   12,86 13,43  
British Pound 18,42   18,10 16,64   18,34   17,31 17,69  
Australian Dollar 10,14   10,13 9,62   10,27   9,97 10,45  
Euro 16,46   16,01 14,77   16,32   15,34 15,79  

6. OTHER NON-OPERATING ITEMS

  Unaudited 
31 December 
2018 
Rm
 
  Unaudited 
31 December 
2017 
Rm 
Audited 
30 June 
2018 
Rm 
 
Derecognition of loans on deregistration of subsidiaries  (36)    (1) –    
(Gain) on derecognition of financial instruments  –     –  (5)   
Impairment of goodwill  31     –  63    
Impairment of non-current receivable  –     20  173    
Impairment of associates and joint ventures  56     –    
Other non-operating items  –     –  (2)   
Total exceptional items  51     19  237    
Business acquisition costs       
   55     26  244    

7. GOODWILL

  Unaudited 
31 December 
2018 
Rm
 
  Unaudited 
31 December 
2017 
Rm 
Audited 
30 June 
2018 
Rm 
 
Carrying value at beginning of period  953     539  539    
Net acquisition of subsidiaries and businesses  86     400  447    
Impairments  (31)    –  (63)   
Currency adjustments     (46) 30    
Carrying value at end of period  1 017     893  953    

8. CASH RESOURCES

  Unaudited 
31 December 
2018 
Rm
 
  Unaudited 
31 December 
2017 
Rm 
Audited 
30 June 
2018 
Rm 
 
Cash resources 788    952 1 737   
Bank overdrafts (848)   (230) (550)  
  (60)   722  1 187   

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

9.1 Fair value hierarchy

The group’s financial instruments carried at fair value are classified in three categories defined as follows:

Level 1 financial instruments are those that are valued using unadjusted quoted prices in active markets for identical financial instruments.

Level 2 financial instruments are those valued using techniques based primarily on observable market data. Instruments in this category are valued using quoted prices for similar instruments or identical instruments in markets which are not considered to be active; or valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based on observable market data.

Level 3 financial instruments are those valued using techniques that incorporate information other than observable market data. Instruments in this category have been valued using a valuation technique where at least one input, which could have a significant effect on the instrument’s valuation, is not based on observable market data.

9.2 Fair values of financial assets and liabilities

The fair values of the remainder of the group’s financial assets and financial liabilities approximate their carrying values.

The following table presents the valuation categories used in determining the fair values of financial instruments carried at fair value.

31 December 2018 Total
Rm
  Level 1
Rm
  Level 2
Rm
  Level 3
Rm
 
Financial assets carried at fair value                
Listed investments (included in investments) 40   40      
Unlisted investments (included in investments) 552       552  
Foreign exchange contracts and other derivative instruments 121     121    
Financial liabilities carried at fair value                
Foreign exchange contracts and other derivative instruments 34     34    

There were no transfers between the fair value hierarchies during the period.

Movements in level 3 financial instruments measured at fair value

The following table shows a reconciliation of the opening and closing balances of level 3 financial instruments carried at fair value.

Financial assets Total 
Rm
 
 
Carrying value at beginning of period 637   
Fair valued through profit or loss 104   
Cash receipts (266)  
Additional investments 77   
Carrying value at end of period 552   

Level 2 valuations techniques

The valuation technique utilised to measure the fair value of foreign exchange contracts is based on the discounted future gains or losses on the underlying instruments. The future gain or losses are determined by taking the rate implicit in the underlying instrument in comparison to a forward rate which is calculated on the current spot rate plus forward points to the date of maturity of said instrument.

Level 3 sensitivity information

The fair values of the level 3 financial instruments of which consists of the fair value of the preference shares and the accrued dividend income were estimated by applying a cash flow projection technique. Cash flow projections are based on expected dividends receivable. These cash flow projections cover a five-year forecast period, which are then extrapolated into perpetuity using a discount rate of 17%. The fair value measurement is based on significant inputs that are not observable in the market. Key assumptions used in the valuations includes the assumed probability of achieving targets and the discount rates applied. The assumed profitabilities were based on historical performances but adjusted for expected growth. The following table shows how the fair value of the level 3 financial assets as at 31 December 2018 would change if the significant assumptions were to be replaced by a reasonable possible alternative.

Financial instruments   Valuation technique   Key assumption   Carrying
value
Rm
  Increase in
carrying
value
Rm
  Decrease in
carrying
value
Rm
 
Unlisted investments (asset)   Income approach   Present value of expected cash flows     552     10     (10)  

10. CONTINGENCIES AND COMMITMENTS

  31 December
2018
Rm
  31 December
2017
Rm
  30 June
2018
Rm
 
Capital commitments# 233   69   343  
Contingent liabilities* 3 330   3 049   3 700  
# The capital commitments relate to the construction of buildings to be utilised by Motus.
* The contingent liabilities include letters of credit and guarantees issued by banks with the corresponding guarantee by the group to the bank.

11. ACQUISITIONS AND DISPOSALS DURING THE PERIOD

Acquisitions

Please refer to acquisitions for the period.

Disposals

There were no material disposals noted during the period.

12. EVENTS AFTER THE REPORTING PERIOD

Shareholders are to be advised that an ordinary dividend has been declared by the board of Motus Holdings Limited on 25 February 2019. For further details, please refer to the dividend declaration.