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accounting policies


New Clicks Holdings Limited is a company domiciled in South Africa. The consolidated financial statements for the year ended 31 August 2006 comprise the company and its subsidiaries (collectively referred to as “the group”).

The financial statements were authorised for issue by the directors on 4 December 2006.

Statement of compliance

The consolidated financial statements for the group are prepared in accordance with International Financial Reporting Standards (“IFRS”) and its interpretations adopted by the International Accounting Standards Board (“IASB”). These are the group’s first consolidated financial statements in accordance with IFRS and consequently IFRS 1 has been applied.

An explanation of how the transition to IFRS has affected the reported financial position and financial performance of the group is provided in note 35.

Basis of preparation

The financial statements are presented in South African Rands, rounded to the nearest thousand. They are prepared on the basis that the group is a going concern, using the historical cost basis of measurement unless otherwise stated.

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods, if the revision affects both current and future periods.

Judgements made by management in the application of IFRS that have a significant effect on the financial statements, and estimates with significant risk of material adjustment in future years are discussed in the relevant note.

The accounting policies set out below have been applied consistently in all material respects to all periods presented in these consolidated financial statements and in preparing an opening IFRS balance sheet as at 1 September 2004 for the purpose of transition to IFRS.

The accounting policies have been applied consistently by all group entities and to all periods presented including the balance sheet at 1 September 2004 for the purposes of transition to IFRS.

Basis of consolidation

The group financial statements include the financial statements of the company, its subsidiaries and other entities that it controls.

Subsidiaries are those entities over whose financial and operating policies the company has the power, directly or indirectly, to exercise control, so as to obtain benefits from their activities. The financial results of subsidiaries are included in the consolidated financial statements from the date that control was acquired and, where applicable, up to the date that control ceases.

As the company controls the New Clicks Holdings Share Trust, this entity has been consolidated into the group financial statements. The shares owned by the trust are accounted for as treasury shares.

The identifiable assets and liabilities of companies acquired are assessed and included in the balance sheet at their fair values as at the date of acquisition.

All intra-group transactions and balances, including any unrealised gains and losses arising from intra-group transactions, are eliminated on consolidation. Unrealised losses are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

Foreign currency

Foreign currency transactions

Transactions in foreign currencies are translated at rates of exchange ruling at the transaction date. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the rates of exchange ruling at that date.

Foreign exchange differences arising on translation are recognised in the income statement.

Foreign operations

The financial statements of foreign operations are translated into the reporting currency as follows:

Goodwill arising on the acquisition of a foreign operation is treated as an asset of the subsidiary and translated at the exchange rate at the balance sheet date.

Exchange differences arising from the translation of foreign operations are taken directly to non-distributable reserves.

Net investment in foreign operations

Exchange gains or losses arising from the translation of assets or liabilities which in substance form part of the group’s net investment in foreign operations are taken to a non-distributable reserve. These gains or losses are released into the income statement only on the disposal of the investment.

Financial instruments

Financial instruments are initially measured at fair value less transaction costs except for financial instruments that are classified as being fair valued through profit and loss. Subsequent to initial recognition, these instruments are classified according to their nature and are measured at either amortised cost or fair value, as appropriate to their financial instrument category.

Offset

Financial assets and financial liabilities are offset and the net amount reported in the balance sheet when the group has a legally enforceable right to set off the recognised amounts, and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Hedge of monetary assets and liabilities

Where a derivative financial instrument is used to hedge the foreign exchange exposure of a recognised monetary asset or liability, no hedge accounting is applied and any gain or loss on the hedging instrument is recognised in the income statement.

Trade and other receivables and loans receivable

Trade and other receivables and loans receivable are classified as loans and receivables. These financial assets originate by the group providing goods, services or money directly to a debtor and are measured at amortised cost less impairment losses.

Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents comprise cash on hand, deposits held on call with banks, and investments in money market instruments, net of bank overdrafts, all of which are available for use by the group unless otherwise stated.

Outstanding cheques are included in trade and other payables.

Cash and cash equivalents are classified in the balance sheet as held-for-trading financial instruments as they are acquired or incurred principally for the purpose of selling or repurchasing in the near term. They are measured at fair value, with any resultant gain or loss on remeasurement recognised in the income statement.

Derivative financial assets/liabilities

The group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investing activities, as well as market risk arising on cash-settled share-based compensation schemes. In accordance with its treasury policy, the group does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as financial instruments held for trading.

Subsequent to initial recognition, derivatives are measured at fair value. The gain or loss arising from a change in fair value on remeasurement is recognised in the income statement in the period in which the change arises.

The fair value of interest rate swaps is the estimated amount that the group would receive or pay to terminate the swap at the balance sheet date. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.

The fair value of option contracts are valued using the Binomial option pricing model.

Interest-bearing loans and borrowings

Interest-bearing loans and borrowings are financial liabilities with fixed or determinable payments that the group has a positive intent and ability to hold to maturity. These financial instruments are subsequently remeasured to amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.

Trade and other payables

Trade and other payables are remeasured to amortised cost.

Derecognition

Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where:

Where the group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the group could be required to repay.

Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is

replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.

Property, plant and equipment

Items of property, plant and equipment, including owner-occupied buildings are stated at historical cost less accumulated depreciation and accumulated impairment losses. Land is stated at cost less impairment losses.

Assets subject to finance lease agreements, in terms of which the group assumes substantially all the risks and rewards of ownership, are capitalised under the same policies as owned assets.

Installation and other costs, which comprise materials and direct labour costs necessarily incurred in order to derive benefit from property, plant and equipment, are included in cost.

Subsequent expenditure relating to an item of property, plant and equipment is capitalised when it is probable that future economic benefits embodied with the item will be increased and flow to the group. All other subsequent expenditure is recognised as an expense in the period in which it is incurred.

Borrowing costs are expensed as incurred.

Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the assets in order to reduce the cost of the asset to its residual value. Residual value is the net amount expected to be recovered from disposal of the asset at the end of its estimated useful life. Residual values and useful lives are reassessed annually.

Land is not depreciated. The expected useful lives of depreciable assets are as follows:

Buildings 50 years  
Computer equipment 3 to 7 years  
Equipment 3 to 10 years  
Furniture and fittings 5 to 10 years  
Motor vehicles 5 years  

Surpluses or deficits on the disposal of property, plant and equipment, comprising the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in the income statement.

Leases

Finance leases

Leases that transfer substantially all the risks and rewards of ownership of the underlying asset to the group are classified as finance leases. Assets acquired in terms of finance leases are capitalised at the lower of fair value and the present value of the minimum lease payments at inception of the lease. The capital element of future obligations under the lease is included as a liability in the balance sheet. Lease payments are allocated using the effective interest rate method to determine the lease finance cost, which is charged against income over the lease period, and the capital repayment, which reduces the liability to the lessor.

A finance lease gives rise to a depreciation expense for the asset as well as a finance expense for each accounting period. The depreciation policy for leased assets is consistent with that for depreciable assets that are owned.

Operating leases

Leases of assets under which substantially all of the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under an operating lease are recognised as an expense on a straight-line basis over the lease term.

Investment properties

Investment properties are held either for the purposes of earning rental income or for capital appreciation, or both. Investment properties are initially recorded at cost and subsequently stated at fair value. Fair value is determined internally each year at the reporting date but is determined at least every three years by an independent registered valuer having an appropriate recognised qualification and experience in the location and category of property being valued. The fair value is based on market value, being the estimated amount for which the property could be exchanged on the date of valuation between a willing buyer and seller in an arm’s length transaction.

Any gain or loss arising from a change in fair value is recognised in the income statement in the period in which it arises. 

Investment properties are not depreciated. 

Intangible assets (other than goodwill)

Intangible assets (other than goodwill) are initially recognised at cost if acquired externally, or at fair value if acquired as part of a business combination. Expenditure on internally-generated development activity is capitalised if the product or process is technically and commercially feasible and the group has sufficient resources to complete development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the associated intangible asset. Other development expenditure is recognised in the income statement as an expense when incurred.

No value is attached to internally developed and maintained trademarks or brand names. Expenditure incurred to maintain trademarks and brand names is charged against the income statement as incurred. 

If assessed as having an indefinite useful life, intangibles are not amortised but are tested for impairment at each balance sheet date and impaired if necessary. If assessed as having a finite useful life, intangible assets are amortised over their useful lives on a straight-line basis and tested for impairment if indications exist that they may be impaired. 

The estimated useful lives of intangible assets with finite lives are as follows: 

Capitalised system development costs – 5 to 10 years

 Trademarks – considering the specific trademark’s circumstances (see note 10)

 Residual values and remaining useful lives of intangible assets with finite useful lives are reassessed annually. 

Goodwill

All business combinations are accounted for by applying the purchase method.

Goodwill represents the premium on acquisition of subsidiaries arising from the difference between the purchase price paid and the group’s interest in the fair value of the net identifiable assets acquired at the date of the transaction.

Goodwill is stated at cost less any accumulated impairment losses. It is not amortised, but is tested annually for impairment. 

Negative goodwill arising on an acquisition is recognised directly in the income statement. The calculation of the gain or loss on disposal of a subsidiary includes the balance of the goodwill relating to the subsidiary disposed of.

Goodwill acquired in a business combination for which the agreement date was prior to 31 August 2004 was previously amortised on a systematic basis over its estimated useful life. The accumulated amortisation previously raised has been netted against the cost to arrive at the deemed cost.

The classification and accounting treatment prescribed by IFRS has not been applied to business combinations that occurred prior to 31 August 2004 for the purposes of preparing the opening IFRS balance sheet at 1 September 2004.

Inventories

Merchandise for resale has been valued on the first-in-first-out (“FIFO”) basis and is stated at the lower of cost and net realisable value. The cost of inventories comprises all costs of purchase, conversion and other costs incurred in bringing the inventories to their present location and condition and is stated net of purchase incentives. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs to sell the product. The cost of merchandise sold includes shrinkage, wastage and inventory losses. Obsolete, redundant and slow-moving inventories are identified on a regular basis and are written down to their estimated net realisable value.

Impairment of assets

The carrying amounts of assets (other than investment properties and deferred tax assets) are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such an indication exists, the asset’s recoverable amount is estimated.

For goodwill, intangible assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date.

Whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount, an impairment loss is recognised in the income statement.

As goodwill is not capable of generating cash flows independently of other assets, in assessing the recoverable amount of goodwill, the goodwill is allocated to cash-generating units on a reasonable and consistent basis. Where appropriate, corporate assets are also allocated to cash-generating units on a reasonable and consistent basis. The recoverable amount of the cash-generating unit (including an allocation of goodwill and corporate assets) is assessed with reference to the future cash flows of the cash-generating unit. Where an impairment is identified for a cash-generating unit, the impairment is applied first to the goodwill allocated to the cash-generating unit and then to other assets comprising the cash-generating unit provided that each identifiable asset is not reduced to below its recoverable amount.

Goodwill and intangible assets with indefinite useful lives were tested for impairment at 1 September 2004, the date of transition to IFRS, even though no indication of impairment existed.

Recoverable amount

The recoverable amount of an asset is the greater of its net selling price and its value in use. Recoverable amounts are estimated for individual assets or, if an asset does not generate largely independent cash flows, for a cash-generating unit. A cash-generating unit is the smallest collection of assets capable of generating cash flows independent of other assets or cash-generating units.

The net selling price is the amount obtainable from the sale of an asset or cash-generating unit in an arm’s length transaction. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset or cash-generating unit and from its disposal at the end of its useful life. The estimated future cash flows are discounted using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Reversal of impairment losses

Reversal of impairment losses recognised in prior years is recorded when there is an indication that the impairment losses recognised for the asset no longer exist or have decreased, either as a result of an event occurring after the impairment loss was recognised or if there has been a change in the estimates used to calculate the recoverable amount.

An impairment loss is reversed only to the extent that the carrying amount of the affected asset is not increased to an amount higher than the carrying amount that would have been determined, net of depreciation or amortisation, had no impairment loss been recognised in prior years. The reversal is recorded as income in the income statement.

An impairment loss in respect of goodwill is never reversed.

Share capital

Ordinary share capital

Ordinary share capital represents the par value of ordinary shares issued, either as part of public offerings or in terms of employee options.

Share premium

Share premium represents the excess consideration received by the company over the par value of ordinary shares issued, and is classified as equity.

Treasury shares

Ordinary shares in New Clicks Holdings Limited which have been acquired by a group company in terms of an approved share repurchase programme or are held by the New Clicks Holdings Share Trust are classified as treasury shares. The cost of these shares is deducted from equity and the number of shares is deducted from the weighted average number of shares. Dividends received on treasury shares are eliminated on consolidation.

Capitalisation share awards and cash distributions

The full value of capitalisation share awards and cash distributions are recorded as a liability and a deduction from equity in the statement of changes in equity when the right to receive payment is established. Upon allotment of shares in terms of a capitalisation award, the election amounts are transferred to the share capital account and share premium account.

Cash distributions and the related Secondary Tax on Companies (“STC”) liability are recorded in the year of declaration.

Employee benefits

Short-term employee benefits

The cost of all short-term employee benefits is recognised as an expense during the period in which the employee renders the related service.

Accruals for employee entitlements to wages, salaries, bonuses, annual and sick leave represent the amounts which the group has a present obligation to pay as a result of employees’ services provided to the balance sheet date. The accruals have been calculated at undiscounted amounts based on current wage and salary rates.

Long-term employee benefits

Liabilities for employee benefits, other than pension plans, which are not expected to be settled within twelve months are discounted to present values using the market yields, at the balance sheet date, on high-quality bonds with maturity dates that most closely match the terms of maturity of the group’s related liabilities.

Defined contribution retirement funds

The group operates a retirement scheme comprising a number of defined contribution funds in South Africa, the assets of which are held in separate trustee-administered funds. The retirement scheme is funded by payments from employees and the relevant group entity. Obligations for contributions to these funds are recognised as an expense in the income statement as incurred.

Post-retirement medical aid benefits

The group’s obligation to provide post-retirement medical aid benefits to certain employees is calculated by estimating the amount of future benefit that qualifying employees have earned in return for their service in the current and prior periods. This benefit is discounted to determine its present value, using a discount rate based on the market yields, at the balance sheet date, on high-quality bonds with maturity dates that most closely match the terms of maturity of the group’s obligation. The calculation is performed by a qualified actuary using the projected unit credit method.

The portion of benefits relating to past service by employees is recognised as an expense on a straight-line basis over the average vesting period. To the extent that the benefits are already vested, past service costs are recognised immediately.

All actuarial gains or losses as at 1 September 2004, the date of transition to IFRS, were recognised immediately. Actuarial gains or losses that arise subsequent to 1 September 2004 in calculating the group’s liability in respect of the plan, are recognised in the income statement immediately.

Equity-settled share-based compensation benefits

The group grants share options to certain employees under an employee share plan. The fair value is measured at grant date and expensed over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Binomial option pricing model, taking into account the terms and conditions under which the options were granted. The amount recognised as an expense is adjusted at each reporting date to reflect the actual number of share options that vest or are expected to vest.

Cash-settled share-based compensation benefits

The group grants share appreciation rights to certain employees in terms of an incentive programme. The value of the obligation in terms of the share appreciation rights is expensed over the vesting period of the rights and the related liability is raised. These share appreciation rights are valued at fair value at each reporting date by an independent expert, using the Binomial option pricing model. Any change in the fair value of the liability is recognised in the income statement.

Provisions

A provision is recognised when the group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the effect of the time value of money is material, the amount of a provision is determined by discounting the future cash flows expected to be required to settle the obligation at a pre-tax rate that reflects the risks specific to the liability.

A provision for onerous contracts is recognised when the expected benefits to be derived by the group from a contract are lower than the unavoidable cost of meeting the obligations under the contract.

Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate.

Guarantees

A financial guarantee is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.

These financial guarantees are classified as insurance contracts as defined in IFRS 4 – Insurance contracts. A liability is recognised when it is probable that an outflow of resources embodying economic benefits will be required to settle the contract and a reliable estimate can be made of the amount of the obligation. The amount recognised is the best estimate of the expenditure required to settle the contract at the balance sheet date. Where the effect of discounting is material, the liability is discounted. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

The group performs liability adequacy tests on financial guarantee contract liabilities to ensure that the carrying amount of the liability is sufficient in view of estimated future cash flows. When performing the liability adequacy test, the group discounts all expected contractual cash flows and compares this amount to the carrying value of the liability. Where a shortfall is identified, an additional provision is made.

Revenue

Turnover

Turnover comprises sales to customers (net of returns) and merchandise sold to franchisees through the group’s supply arrangements. Turnover is stated exclusive of value-added and general sales tax. Revenue from sales is recognised when the significant risks and rewards of ownership are transferred to the buyer, costs can be measured reliably, and receipt of the future economic benefits is probable.

Financial income

Financial income comprises interest income which is recognised in the income statement on a time proportion basis, taking account of the principal outstanding and the effective interest rate over the period to maturity, when it is probable that such income will accrue to the group.

Dividend income is recognised when the right to receive payment is established.

Distribution and logistics fee income

Revenue in respect of services rendered is recognised in income as the services are rendered.

Franchise fee and other recovery income

Franchise fee and other recovery income is recognised in income when the group becomes contractually entitled to the income or when it is virtually certain that the conditions required to be fulfilled before payment is received will be fulfilled.

Rental income

Income from operating leases in respect of property is recognised on a straight-line basis over the lease term.

Financial expenses

Financial expenses comprise interest payable on borrowings calculated using the effective interest rate method and gains and losses on interest rate swaps.

The group has elected not to capitalise borrowing costs on qualifying assets.

The interest expense component of finance lease payments is recognised in the income statement using the effective interest rate method.

Income tax expense

The income tax expense on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity in which case the tax is recognised in equity, or arising on a business combination that is an acquisition, in which case it is recognised in goodwill.

Current tax

Current tax comprises expected tax payable calculated on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax

Deferred tax is provided at current rates using the balance sheet liability method. Full provision is made for all temporary differences between the tax value of an asset or liability and its carrying amount for financial reporting purposes. The effect on deferred tax of any changes in tax rates is recognised in the income statement, except to the extent that it relates to items previously charged or credited directly to equity.

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted or substantively enacted at the balance sheet date.

Deferred tax assets are recognised for all deductible temporary differences and tax losses to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences and tax losses can be utilised.

Deferred tax assets previously recognised are expensed to the income statement to the extent that it is no longer probable that the tax assets will be realised.

Secondary Tax on Companies

Secondary Tax on Companies (“STC”) arising on net dividends paid is recognised as a tax charge in the same year as the liability to pay the related dividend.

Segment reporting

A segment is a distinguishable component of the group that is engaged either in providing products or services, or in providing goods or services within a particular economic environment, which is subject to risks and rewards that are distinguishable from those of other segments. The group is organised into trading business units which in turn are categorised broadly between distribution and retail. Segment reporting is presented on this basis. The group operates exclusively within the southern African region and has therefore not presented geographical segment information.

Segment result includes revenue and expenses directly attributable to a segment and the relevant portion of enterprise revenue and expenses that can be allocated on a reasonable basis to a segment, whether from external transactions or from transactions with other group segments. Inter-segment transfer pricing is based on cost plus an appropriate margin.

Segment assets and liabilities comprise those assets and liabilities that are directly attributable to the segment or can be allocated to the segment on a reasonable basis.