Notes to the condensed consolidated financial statements

1. BASIS OF PREPARATION

The unaudited condensed consolidated financial statements have been prepared in accordance with the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and financial reporting pronouncements as issued by the Financial Reporting Standards Council (FRSC). The results contain the information as required by 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 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 2019.

These 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 2020.

2. ACCOUNTING POLICIES

The accounting policies adopted and methods of computation used in the preparation of the condensed consolidated financial statements are in accordance with International Financial Reporting Standards (IFRS) and are consistent with those of the annual financial statements for the year ended 30 June 2019, with the exception of new policies as required by new and revised IFRS issued and in effect.

3. ADOPTION OF STANDARDS ISSUED AND EFFECTIVE AND RELATED IMPACTS ON SIGNIFICANT ACCOUNTING POLICIES

In the current year, effective 1 July 2019, IFRS 16 – Leases became applicable to the Group for the first time. Details of the expected impact of this standard were outlined in the 30 June 2019 annual financial statements.

IFRS 16 introduces new requirements with respect to lease accounting by removing the distinction between operating and finance leases for lessees, requiring the recognition of right-of-use assets and lease liabilities at commencement of all leases with limited practical exceptions allowed by the standard.

Lessor accounting remains similar to former practice; ie lessors continue to classify leases as finance leases or operating leases. IFRS 16 provides additional disclosures for both lessees and lessors.

The Group adopted IFRS 16 using the modified retrospective approach. The comparative information for 2019 has not been restated, and the cumulative effect of the initial application of IFRS 16 has been recognised as an adjustment to the opening balance of retained earnings as at 1 July 2019. The right-of-use assets is the carrying amount as if the standard had been applied since the commencement date, but discounted using the Group’s incremental borrowing rate at the date of initial application. Right-of-use assets are depreciated over the shorter of the lease term and the useful life of the underlying asset. The related lease liabilities are the present value of the minimum lease payments plus the related interest less the rental payments. Any lease smoothing liabilities, in terms of IAS 17 – Leases, were derecognised as part of the net adjustment to the opening balance of retained earnings as at 1 July 2019.

The majority of the Group’s long-term property, vehicles, equipment and other leases previously classified as ‘’operating leases’’ under IAS 17 and were expensed to profit or loss on a straight-line basis are now recognised in the statement of financial position. Rental contracts are typically entered into for fixed periods but may have extension options. Lease terms are negotiated on an individual basis and contain a range of terms and conditions. The impact of IFRS 16 is excluded in terms of the facility agreements from the bank covenant calculations and the right-of-use assets may not be used as security for borrowing purposes.

When the Group is an intermediate lessor, it accounts for the head lease and the sub-lease as two separate contracts. The sub-lease is classified as a finance lease receivable by reference to the right-of-use asset arising from the head lease. The Group recognised the present value of future lease payments under the head lease as a lease liability, and capitalised the present value of the future lease receivables under its sub-lease contracts as a net investment in lease receivables.

In applying IFRS 16 for the first time, the Group used the following practical expedients permitted by the standard in the application of the initial accounting:

  • Leases where the maximum lease term is 12 months or less will be treated as operating leases and will be expensed to profit or loss.
  • Leases of low-value assets will be treated as an operating lease and expensed to profit or loss.
  • The Group has elected to not reassess whether a contract is, or contains a lease on the date of adoption of 1 July 2019. Instead, if a contract was a lease in terms of IAS 17 and IFRIC 4 it will remain a lease in terms of IFRS 16.
  • Where the contract contains options to extend or terminate the lease, this will only be taken into account if it was reasonably certain that the option will be exercised or lease will be terminated.

Critical accounting judgements and key sources of estimation uncertainty

Extension and terminations

Extension and termination options are included in various lease agreements in the Group. The Group has applied judgement to determine the lease term for some of the lease contracts. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, affecting the value of the right-of-use assets and the lease liabilities at initial recognition.

The judgements applied relate to the determination of economic incentive to extend or to terminate. This is determined on a lease-by-lease basis with reference to past experience as well current and future performance indicators of the underlying businesses utilising the right-of-use asset. Further considerations are given to specific terms and clauses in the various underlying agreements as well as other factors that may be applicable to the segment or the geography in which the assets will operate in.

Incremental borrowing rate

IFRS 16 defines an appropriate discount rate as either the rate implicit in the lease or the entity’s incremental borrowing rate. The incremental borrowing rate, is the amount that is defined as the interest rate at which the entity can borrow funds of a similar amount to the lease term; secured by the right-of-use asset associated with the lease; for a similar term to the lease and in a similar economic environment. Motus has elected to use the incremental borrowing rate.

The Group has applied judgement in assessing the incremental borrowing rate taking into account:

  • The lease term.
  • Nature of the lease.
  • The geography and currencies in which the leases are denominated.
  • An appropriate base risk-free rate.
  • Motus’s credit spread and credit risk.

Impact on the financial statements

As at 1 July 2019 the right-of-use assets for the leases amounted to R1 881 million. The related lease liabilities amounted to R2 336 million.

   July 2019 
Increase/ 
(decrease)
Rm  
ASSETS    
Right-of-use assets  1 881 
Net investment in the lease receivables  133 
   2 014 
Deferred tax asset  71 
Total assets  2 085 
EQUITY AND LIABILITIES    
Retained income  (176)
Non-controlling interest  (2)
Lease liabilities  2 336 
Operating lease smoothing liability  (73)
Total equity and liabilities  2 085 

Within the statement of profit or loss, operating expenses were decreased by reduced rental expenses offset by an increased amortisation on the right-of-use assets. Interest was increased by the interest on the lease liabilities. The impact on the profit before tax was immaterial. Where lease liabilities subject the Group to foreign currency exposure, it will result in foreign exchange differences.

On the statement of cash flow, operating cash flows were higher as the principal portion of the cash payments against the lease liability are now classified within financing activities, with only the interest portion of the payment remaining in operating cash flows.

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

IFRS 9 – Financial Instruments

The Group still applies IAS 39 – Financial Instruments for hedge accounting, until such time as the macro-hedging project has been concluded. The principal difference in the two standards is the hedging documentation requirements. Under IFRS 9 there is greater detail required on the Group’s risk management strategy and risk managements objectives, the eligibility of more items that can be utilised as hedging instruments and determination and measurement of hedge effectiveness. Motus is still assessing the impact the application of IFRS 9 will have on the disclosures and other factors relating to hedge accounting.

5. EXCHANGE RATES

  Closing rates Average rates
  December
2019
  June
2019
December
2018
  December
2019
  June
2019
December
2018
 
US Dollar 14,01   14,10 14,39   14,73   14,18 14,17  
British Pound 18,51   17,95 18,42   18,50   18,35 18,34  
Australian Dollar 9,84   9,90 10,14   10,05   10,14 10,27  
Euro 15,72   16,06 16,46   16,29   16,18 16,32  

6. GOODWILL

   Unaudited 
31 December 
2019 
Rm 
  Unaudited 
31 December 
2018 
Rm 
Audited 
30 June 
2019 
Rm 
  
Carrying value at beginning of period 1 020    953  953    
Net acquisition of subsidiaries and businesses 142    86  111    
Impairments (68)   (31) (37)   
Currency adjustments 33    (7)   
Carrying value at end of period 1 127    1 017  1 020    

7. CASH RESOURCES

   Unaudited 
31 December 
2019 
Rm 
   Unaudited 
31 December 
2018 
Rm 
Audited 
30 June 
2019 
Rm 
  
Cash resources 788    788  1 042    
Bank overdrafts (503)   (848) (102)   
  285    (60) 940    

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

8.1

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.

8.2

Fair value of financial assets and liabilities

Where the Group’s financial assets and financial liabilities are not fair valued and are carried at amortised cost, they approximate their fair values.

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

   Total
Rm
Level 1
Rm
Level 2
Rm
Level 3
Rm
 
31 December 2019          
Financial assets carried at fair value          
Listed investments (included in investments) 10 10  
Unlisted investments (included in investments) 450 16 434  
Foreign exchange contracts and other derivative instruments 7 7  
Financial liabilities carried at fair value          
Contingent consideration 17 17  
Foreign exchange contracts and other derivative instruments 397 397  

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:

   Total 
Rm 
  
Financial assets    
Carrying value at beginning of period 474   
Additional investment in underlying preference shares 105   
Dividends received (252)  
Fair valued through profit or loss as unrealised gains 107   
Carrying value at the end of the period 434   
Financial liabilities    
Carrying value at beginning of period 26   
Payment made to former equity holder of subsidiary acquired (9)  
Carrying value at the end of the period 17   

Level 2 valuations techniques

Forward exchange contracts

Future cash flows estimated based on forward exchange rates (from observable forward exchange rates at the end of the reporting period) and contract forward rates, discounted at the rate that reflects the credit risk of the various counterparties at the date of entering in to the contract.

Other derivative instruments

The differential on current market interest rates and contract fixed rates on interest rate swaps.

Level 3 sensitivity information

The fair value of the level 3 financial assets of R434 million (2019: R552 million) consists of investments in cell captives through unlisted preference share instruments in insurance companies. These fair values were estimated by applying a discounted cash flow projection technique. Cash flow projections are based on expected dividends receivable which are subject to regulation. The cash flow projections cover a five-year forecast period, discounted at a WACC of 18% specifically linked to motor-related financial services. The projections are limited to five years as the underlying business will be run off over this period with reducing dividend pay outs and the settlement of the capital. A new preference share structure with a new underwriter was subscribed for in the current financial period.

The fair value measurement is based on significant inputs that are not observable in the market. Key assumptions used in the valuation include underwriting risk, operational risk and investment risk. The dividends receivable are calculated from the assumed profits after taking into account the abovementioned risk inputs.

The fair value of the level 3 financial liability of R17 million (2019: Rnil) is the contingent consideration payable in respect of the Rhino Outdoor and Off-road Proprietary Limited acquisition and is payable over the next two years. The amount payable is based on a multiple of operating profit after tax as required in the purchase agreement.

The following table shows how the fair value of the level 3 financial assets and liabilities as at 31 December 2019 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 
 
Financial assets              
Preference shares Cash flow projections Present value of expected dividend flows   434 6 (6)  
Financial liabilities              
Contingent consideration Multiples of future net operating profits after tax Future expected profits   17 0,2 (0,2)  

9. OTHER NON-OPERATING ITEMS

   31 December 
2019 
Rm 
   31 December 
2018 
Rm 
30 June 
2019 
Rm 
  
Derecognition of loans on derecognition of dormant companies –    36  36   
Impairment of goodwill (68)   (31) (37)  
Reversal of/(impairment) of associates and joint ventures   (56) (72)  
Impairment of asset classified as held for sale –    –  (10)  
Other non-operating items –    –   
Total exceptional items (63)   (51) (80)  
Amortisation on intangible assets arising on business combinations (5)   (9) (17)  
Gain on derecognition of financial instrument 10    –  –   
Business acquisition costs (1)   (4) (7)  
Other non-operating items (59)   (64) (104)  

10. CONTINGENCIES AND COMMITMENTS

   31 December
2019
Rm
   31 December
2018
Rm
30 June
2019
Rm
  
Capital commitments# 337   233 254  
Contingent liabilities* 2 761   3 330 3 779  

# 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 business combinations for 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 on 25 February 2020. For further details, please refer to the dividend declaration.

Please refer to business combinations for acquisition of business after reporting date.