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notes to the financial statements (31-36)

for the year ended 31 August 2006

31

Contingent liabilities

The company has furnished guarantees to bankers in respect of gross liabilities of R988.8 million recognised on the balance sheets of certain subsidiary companies. The net liability recognised on the group balance sheet in respect of these liabilities is R148.8 million.
 
A subsidiary has provided a guarantee to their bankers, in respect of that subsidiary’s owner driver scheme. Should the driver default on repayments of the loan instalments, that subsidiary company would be required to settle any remaining obligation to the banker. The net amount owing by the owner drivers is R5.1 million at the balance sheet date.
 
The company has guaranteed a R50 million facility given to Intercare by their bankers as detailed in notes 13.2 and 20.
 
In the opinion of the directors, the possibility of loss arising from these guarantees is remote.
 

32

Related party transactions

Group
Transactions between group subsidiaries
During the year, in the ordinary course of business, certain companies within the group entered into transactions. These intra-group transactions have been eliminated on consolidation. See the group subsidiaries.
 
Directors and key management
A number of directors of the company hold positions in other entities, where they may have significant influence over the financial or operating policies of these entities. Accordingly, the following is considered to be such an entity:
 
Director               Entity
DM Nurek             Investec Bank Limited
 
Transactions between the group and this entity have occurred under terms and conditions that are no more favourable than those entered into with third parties in arm’s length transactions.
 
These transactions include: 
i) Investec Bank Limited manages certain cash on call on behalf of group companies. 
ii) Investec Bank Limited has provided funding to group companies. 
iii) A group company has invested in an Investec Bank Limited group company. Refer to note 28
iv) A group company has purchased a derivative instrument from Investec Bank Limited. Refer to note 16.

Certain non-executive directors of the group are also non-executive directors of other public companies which transact with the group. Except as disclosed above, the relevant directors do not believe they have control, joint control, or significant influence over the financial or operating policies of those companies. Those entities are not disclosed above.
 
Executive directors’ employment contracts do not provide for a predetermined period of employment but, to ensure business continuity, do specify an eighteen-month notice period prior to termination by the company. During this period, all standard employee benefits accrue to the directors in question. Contracts do not provide for predetermined compensation benefits on termination other than those accorded to all employees in terms of group remuneration policies.
 
Employee benefits paid to directors and key management personnel are detailed in note 4.
 
Shares held by directors and their related entities
The percentage of shares held by directors of the company and their related entities at the balance sheet date are disclosed in the Corporate Governance section of this annual report.
 
Company
A schedule of the loans and investments in related parties is included here. The company received dividends to the value of R68.6 million (2005: R130.9 million) from New Clicks South Africa (Proprietary) Limited, a wholly-owned subsidiary, and in turn paid dividends on treasury shares held by that subsidiary to that subsidiary of R4.9 million (2005: R10.2 million). In addition, the company paid dividends to the Share Trust on shares held by the Share Trust of R0.9 million (2005: R1.0 million). Details regarding distributions relating to treasury shares are included in note 25.
 

33

Events subsequent to balance sheet date


  
No significant events took place between the end of the financial year under review, and the date of signature of these financial statements with the exception of the approval of the final distribution (see the Directors’ Report  for more details).
 

34

Borrowing powers

In terms of the articles of association, the borrowing powers of the company are unlimited.
 

35

Impact of conversion to International Financial Reporting Standards (“IFRS”) and other adjustments

For the year ended 31 August 2005, the group prepared its financial statements in accordance with South African Statements of Generally Accepted Accounting Practice (“SA GAAP”). JSE Limited (“JSE”) Listings Requirements prescribe that a company listed on the JSE prepare its annual financial statements in accordance with IFRS. IFRS refers to the application of International Accounting Standards (“IAS”) and International Financial Reporting Standards (“IFRS”).
 
This requirement applies to all listed companies for financial reporting periods beginning on or after 1 January 2005, and consequently the year ended 31 August 2006 is the group’s first annual published financial statements under IFRS. As the group publishes comparative financial information for one year, the date of transition to IFRS is 1 September 2004, the start of the earliest period of comparative information presented.
 
The group has restated information previously published under SA GAAP to the equivalent basis under IFRS. This restatement follows the guidelines set out in IFRS 1 – First-time Adoption of International Financial Reporting Standards.
        Group  
              Tax rate      
      Gross   Tax   change   Net  
IFRS conversion adjustments Notes   R’000   R’000   R’000   R’000  
Impact on distributable reserve at 1 September 2004                    
IFRS 1 – Trademark re-recognition 35.1   372 000   (111 600)     260 400  
IFRS 2 – Share-based payments 35.2   (9 035)       (9 035)  
IAS 2 – Settlement discounts in inventory 35.3   (20 600)   6 180     (14 420)  
IAS 16 – Property, plant and equipment 35.4          
IAS 39 – Impairment of trade receivables 35.5   3 598   (1 079)     2 519  
Total IFRS conversion adjustments     345 963   (106 499)     239 464  
Impact on distributable reserve at 31 August 2005                    
IFRS 1 – Trademark re-recognition 35.1   372 000   (111 600)   3 720   264 120  
IFRS 2 – Share-based payments 35.2   (14 414)       (14 414)  
IAS 2 – Settlement discounts in inventory 35.3   (23 653)   7 065   (206)   (16 794)  
IAS 16 – Property, plant and equipment 35.4          
IAS 39 – Impairment of trade receivables 35.5   2 952   (892)   36   2 096  
Total IFRS conversion adjustments     336 885   (105 427)   3 550   235 008  
Impact on profit for the year – 2005                    
IFRS 1 – Trademark re-recognition 35.1       3 720   3 720  
IFRS 2 – Share-based payments 35.2   (5 379)       (5 379)  
IAS 2 – Settlement discounts in inventory 35.3   (3 053)   885   (206)   (2 374)  
IAS 16 – Property, plant and equipment 35.4          
IAS 39 – Impairment of trade receivables 35.5   (646)   187   36   (423)  
Total IFRS conversion adjustments     (9 078)   1 072   3 550   (4 456)  
Impact on profit for the year – 2006                    
IFRS 1 – Trademark re-recognition 35.1          
IFRS 2 – Share-based payments 35.2   (5 623)       (5 623)  
IAS 2 – Settlement discounts in inventory 35.3   3 167   (918)     2 249  
IAS 16 – Property, plant and equipment 35.4   4 834   (400)     4 434  
IAS 39 – Impairment of trade receivables 35.5   ( 507)   147     (360)  
Total IFRS conversion adjustments     1 871   (1 171)     700  

A deferred tax asset was raised when the trademarks referred to in note 35.1 were written off against share premium in 1996. This deferred tax asset was credited to a non-distributable reserve. As a result of the trademarks being re-recognised in accordance with IFRS 1, the deferred tax asset has been reversed and the non-distributable reserve transferred to distributable reserves.
 
In addition to the impact on distributable reserves, the adjustment relating to IFRS 2 in respect of share options has a further impact on the share option reserve, a new class of equity created in order to comply with this standard.

         Group  
                Tax rate      
        Gross   Tax   change   Net  
  Other adjustments Notes   R’000   R’000   R’000   R’000  
  Impact on distributable reserve at 1 September 2004                    
  Inventory adjustments 35.6   (141 406)   42 419     (98 987)  
  Leave-pay provision 35.7   (5 896)   1 769     (4 127)  
  Bonus provision 35.8   (12 684)   3 805     (8 879)  
  Sundry debtors impairments 35.9   (25 080)       (25 080)  
  Onerous leases 35.10   (15 282)   4 585     (10 697)  
  Property, plant and equipment impairments 35.11   (5 603)   1 681     (3 922)  
  Total other adjustments     (205 951)   54 259     (151 692)  
  Impact on distributable reserve at 31 August 2005                    
  Inventory adjustments 35.6   (158 137)   47 270   (1 414)   (112 281)  
  Leave-pay provision 35.7   ( 4 055)   1 235   (59)   (2 879)  
  Bonus provision 35.8   (14 678)   4 383   (127)   (10 422)  
  Sundry debtors impairments 35.9   (25 080)       (25 080)  
  Onerous leases 35.10   (19 303)   5 751   (153)   (13 705)  
  Property, plant and equipment impairments 35.11   (11 746)   3 463   (56)   (8 339)  
  Total other adjustments     (232 999)   62 102   (1 809)   (172 706)  
  Impact on profit for the year – 2005                    
  Inventory adjustments 35.6   (16 731)   4 851   ( 1 414)   (13 294)  
  Leave-pay provision 35.7   1 841   (534)   (59)   1 248  
  Bonus provision 35.8   (1 994)   578   (127)   (1 543)  
  Sundry debtors impairments 35.9          
  Onerous leases 35.10   (4 021)   1 166   (153)   (3 008)  
  Property, plant and equipment impairments 35.11   (6 143)   1 782   (56)   (4 417)  
  Total other adjustments     (27 048)   7 843   (1 809)   (21 014)  
  Impact on profit for the year – 2006                    
  Inventory adjustments 35.6   6 506   (1 887)     4 619  
  Leave-pay provision 35.7   (6 652)   1 929     (4 723)  
  Bonus provision 35.8   (3 017)   875     (2 142)  
  Sundry debtors impairments 35.9          
  Onerous leases 35.10   4 563   (1 323)     3 240  
  Property, plant and equipment impairments 35.11   546   (158)     388  
  Total other adjustments     1 946   (564)     1 382  

IFRS conversion adjustments
35.1 Trademark re-recognition
The group wrote off trademarks relating to the Clicks and Discom businesses of R372 million against Share Premium in 1996. IFRS 1 requires the group to re-recognise all assets and liabilities at the date of transition to IFRS that were acquired or assumed in a past business combination.

The trademarks have accordingly been re-recognised out of distributable reserves. The trademarks are treated as intangible assets with indefinite useful lives in accordance with IAS 38 – Intangible assets. The trademarks are consequently not amortised but are subject to an annual impairment test. (See note 10).
 
The deferred tax asset raised on the write-off of the trademarks was charged to equity by way of a non-distributable reserve. As a result of the trademark being re-recognised, the deferred tax asset has reversed and the related non-distributable reserve has been transferred to the distributable reserve.
 
35.2 Share-based payments
In terms of IFRS 2, all share-based payment transactions must be recognised in the financial statements using a fair value measurement basis and charged when the goods or services are consumed. It requires the fair value of all equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions on which those instruments were granted.

This standard applies to all options granted after 7 November 2002 which had not vested by 1 January 2005. The fair value of these options was determined at the grant date using the Binomial option pricing model. In addition to options that have already vested and have not been forfeited, the fair value of the options that are expected to vest has been amortised over the vesting period. (See note 18).
 
35.3 Settlement discounts in inventory
IAS 2 – Inventories requires trade discounts, rebates and other similar items to be deducted from the cost of purchase of an item of inventory. In prior years, cash discounts received from suppliers were included in other income. Cash discounts are now shown as a reduction of cost of merchandise sold for the year, with a consequential reduction in the inventory valuation at the reporting date, consistent with current interpretation.
 
35.4 Property, plant and equipment
IAS 16 – Property, plant and equipment requires an annual assessment of the remaining useful lives and residual values of all assets and for depreciation to be adjusted accordingly. The group has reviewed the remaining useful lives and residual values of all assets and has recalculated depreciation. The cumulative impact of this change at the date of transition to IFRS was not material and comparatives have consequently not been restated. The cumulative difference at the date of transition has been accounted for prospectively. The asset classes impacted were buildings and motor vehicles.
 
35.5 Impairment of trade receivables
IAS 39 – Financial Instruments: Recognition and measurement prohibits general doubtful debt provisions and requires an impairment in the case where objective evidence of impairment exists. The impairment is calculated based on an “incurred loss” model rather than an “expected loss” model.

The group has recalculated the value of trade receivables impaired in accordance with this standard.
 
Other adjustments
35.6 Inventory adjustments
Rebates and distribution costs were previously recognised as other income and expenses respectively in the period incurred. The group has now recognised rebates and distribution centre costs as part of the cost of merchandise which has had the effect of reducing the value of inventories. The group now complies with IAS 2 in respect of these component costs of inventory.

In addition, the group has historically used the Retail Inventory Method to estimate the first-in-first-out (“FIFO”) cost of inventory. The assumptions and methodology applied by the group in using the Retail Inventory Method were reviewed and refined during the year in the context of more reliable information becoming available, to more accurately reflect the FIFO cost of inventory. This has been adjusted retrospectively and comparatives have been restated.
 
35.7 Leave-pay provision
The group has corrected a historic underprovision in the provision for leave-pay. The group now complies with IAS 19 –Employee benefits in this regard. The adjustment has been made retrospectively and comparatives have been restated.
 
35.8 Bonus provision
The group has corrected a historic underprovision in the provision for bonuses which are employee obligations at the balance sheet date. The group now complies with IAS 19 – Employee benefits in this regard. The adjustment has been made retrospectively and comparatives have been restated.
 
35.9 Sundry debtors impairments
Various receivables existed at the end of the previous financial year which should have been impaired in earlier financial years. These have been impaired in the relevant year and comparatives have been restated as necessary.
 
35.10  Onerous leases
The group has corrected a historic underprovision in relation to onerous lease contracts. The group now complies with IAS 37 – Provisions and contingencies in respect of onerous leases. The provision has been determined based on the present value of future cash flows relating to contracts where the present value of the cash flows exceeds the benefits from the related contracts. The adjustment has been made retrospectively and comparatives have been restated.
 
35.11  Property, plant and equipment impairments
As part of the exercise of converting to IFRS, the group has critically assessed the recoverable values of all its assets and has identified assets that are no longer in use. These assets relate primarily to closed stores and obsolete information technology assets and have accordingly been written off. The adjustment has been made retrospectively and comparatives have been restated.
 

Reclassifications
Rebate and settlement discount income was previously included in other income and is now included in cost of merchandise sold.
 
Distribution costs were previously disclosed in the income statement based on their nature, but are now included in cost of merchandise sold.
 
Pharmaceutical distribution income was previously included as a reduction in cost of merchandise sold and is now included in other income.
 
Balance sheet line items have been renamed to be consistent with current terminology. Various reclassifications have been made as detailed here.
 
Reconciliation between SA GAAP and IFRS
A reconciliation of the transitional balance sheet, comparative balance sheet and comparative income statement from SA GAAP to IFRS is presented here.
 

36

Standards issued but not yet effective

The directors have considered all Standards and Interpretations that have been issued but which are not yet effective and found those set out below to be applicable.
 
IFRIC 4
This interpretation is effective for the group for the year ending 31 August 2008. This interpretation requires that where an entity enters into an arrangement that depends on the use of a specific asset and that arrangement conveys the right to control this specific asset, then this arrangement should be treated as an asset under IAS 17 – Leases. Arrangements that are in substance leases should be assessed against the criteria included in IAS 17 to determine whether the arrangement should be accounted for as a finance or operating lease. This interpretation is not likely to have a material impact on the financial results presented in the current or future periods.
 
IFRS 7
The disclosures provided in respect of financial instruments in the financial statements for the year ending 31 August 2008, as well as comparative information, will be compliant with IFRS 7. IFRS 7 requires additional disclosure compared to that required in terms of existing IFRS in respect of, amongst others, capital objectives and policies. The adoption of IFRS 7 will not have any impact on the accounting policies adopted for financial instruments.