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LEWI - Availability of Unaudited Interim Results
LEWIS GROUP LIMITED
Registration number: 2004/009817/06
Bond code: LEWI
Availability of the Unaudited Interim Results for the six months ended 30 September 2018
In terms of section 7.4 of the Debt Listings Requirements of the JSE Limited, investors are advised
that the company’s unaudited interim results for the six months ended 30 September 2018 are
immediately available for viewing and downloading at;
http://www.lewisgroup.co.za/wp-content/uploads/2018/11/JOB016937_Lewis_Interims_Web.pdf
UNAUDITED INTERIM RESULTS
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2018
(INCLUDING IFRS 9 IMPLEMENTATION REPORT)
Highlights
Merchandise sales up 25.9%
Gross profit margin 39.9%
Debtor costs reduced by 20.8%
Merchandise sales excluding UFO up 8.1%
Headline earnings per share up 10.7%
Interim dividend up 5% to 105 cents per share
Balance sheet ungeared
Launched omni-channel retailer INspire
Commentary
Trading and financial performance
The turnaround in performance has continued and Lewis Group delivered strong merchandise
sales growth, tight cost control, lower debtor costs and growth in earnings. This is supported by
early benefits from the group's diversification strategy.
Merchandise sales were boosted by the acquisition of United Furniture Outlets (UFO) and
increased by 25.9% to R1.6 billion. UFO contributed sales of R230 million for the six months
following the successful integration of the brand into the group. Excluding the sales from UFO, the
group's merchandise sales grew by 8.1%. Comparable store sales increased by 7.8%. Stores outside
South Africa contributed 22% (H1 2018: 24.3%) of merchandise sales.
Cash sales increased by 72%, driven primarily by UFO which is a cash retailer, and credit sales by
4.2%. Group credit sales accounted for 57.1% (H1 2018: 68.8%) of total sales.
Group revenue increased by 11.2% and by 2.4% excluding the contribution from UFO (9.3% and
0.4% after adjustment for credit impaired accounts). Other revenue, incorporating finance
charges and initiation fees, insurance premiums and services rendered, declined by 2.8%
(6.6% after adjustment for credit impaired accounts) mainly due to lower credit sales in prior years
which limited annuity income as well as the adverse impact of regulatory capping of credit
insurance.
The group's gross profit margin at 39.9% (H1 2018: 41.6%) remains within management's target
range of 38% to 42%.
The growth in operating costs, excluding debtor costs, was contained well below the growth in
sales and increased by 12.9%. Excluding UFO, costs increased by 6.8%. Marketing and promotional
costs were increased to support sales growth, including the launch of INspire, the omni-channel
home shopping business.
The group's operating margin declined from 7.2% to 6.7%, mainly due to the decline in other
revenue, and is within management's guided range of 5% to 10%.
Finance costs showed a R21.3 million year-on-year movement owing mainly to gains on forward
exchange contracts covering merchandise imports.
Headline earnings increased by 4.5% to R149.6 million (H1 2018: R143.1 million) with headline
earnings per share 10.7% higher at 180.8 cents (H1 2018: 163.3 cents).
The balance sheet is ungeared at the half year. The group's net asset value per share declined by
9.4% to 5 922 cents owing to the impact of the introduction of IFRS 9 (refer to Debtor
Impairment below).
The group remains highly cash generative with cash and cash equivalents totalling R543 million at
the end of the reporting period.
The group has increased its interim dividend by 5% to 105 cents per share.
Debtor management
Debtor costs continued to decline and reduced by 20.8% over the prior period (before adjustment
for credit impaired accounts) as collection rates improved to 77.2% (H1 2018: 76.2%), despite the
deteriorating consumer environment. Debtor costs (before credit impaired adjustment) as a
percentage of net debtors decreased from 7.8% to 6.5%. The level of satisfactory paid customers
improved to 69.9% from 68.4% at the end of the 2018 financial year.
Debtor impairment
IFRS 9 - Financial Instruments is effective for the group for the year ending 31 March 2019,
replacing IAS 39 - Financial Instruments: Recognition and Measurements. The most significant
impact of IFRS 9 on the group relates to the implementation of the forward-looking expected
credit loss impairment model on the measurement of debtors. IAS 39 applied the incurred loss
model. Refer to note 2 for further detail on the transition to IFRS 9.
The adoption of IFRS 9 does not impact on the group's credit management practices and
business model and these will continue to be consistently applied as in the past.
The impact of the transition to IFRS 9 is that the total balance sheet impairment provision
increased by R803 million from R1.62 billion as at 31 March 2018 to R2.42 billion as at 1 April 2018.
This is mainly driven by an increase in the impairment of R658 million in the satisfactory paid
category of accounts due to the forward-looking nature of the expected credit loss provisioning
methodology.
The impairment provision of 29.6% under IAS 39 at 31 March 2018 consequently increased to
43.9% under IFRS 9 at 1 April 2018 following the adoption of IFRS 9.
At 30 September 2018 the impairment provision reduced to 43.5% from 43.9.% at 31 March 2018.
Expanding retail presence
The group's strategy of diversifying across market segments and retail channels continued with
the integration of UFO and the launch of INspire.
UFO has enabled the group to access higher income customers while increasing the cash-to-
credit sales mix. While the availability of space in upmarket shopping malls is proving to be a
hurdle to expanding the chain, two stores were opened during the period. A further three stores
opened in October and two more outlets are planned to open before December.
INspire aims to attract customers in the LSM 4 - 8 categories to extend the group's presence in
urban areas. The business is marketed through outbound call centres, agents and online shopping,
with an extensive product offering across linen, bedding, tableware, cookware and small electrical
appliances. After a slower than expected start, INspire reported sales of R4.2 million for the four
months to the end of September. The business is gaining momentum and sales for October were
encouraging.
The group's store base increased to 779 following the opening of 14 stores and closure of 8 stores
during the reporting period. This comprises Lewis (494 stores), Best Home and Electric (133
stores), Beares (119 stores) and UFO (33 stores). Lewis continues to open smaller format stores
which now account for 43% of the brand's stores. During the period 92 stores were refurbished.
The number of stores in the neighbouring countries of Botswana, Lesotho, Namibia and Swaziland
increased by 6 to 116, including the opening of the first 5 Best Home and Electric stores in
Namibia.
Share repurchase programme
The group repurchased 1.7 million shares during the reporting period, at an average price of
R29.41 per share. Since the commencement of the current share repurchase programme the group
has bought back 4.2 million shares at an average price of R28.66 per share. At the group's annual
general meeting in October 2018 shareholders granted management the authority to repurchase
up to a further 10% of the issued share capital.
Outlook
The change in the affordability assessment regulations of the National Credit Act has
enabled self-employed and informally employed individuals to again apply for credit. This is
expected to improve the performance of the group's stores in rural areas which have been most
affected by these restrictive regulations. While it will take time before many of these individuals
re-enter the credit market, sales to this customer category are encouraging and early payment
performance is satisfactory.
The current sales momentum is expected to be maintained into the second half, with UFO
complementing the performance of the traditional retail brands. UFO is performing well and
customers have responded positively to the new ranges introduced in October. The group plans
to open a net six stores across all brands in the second half of the year.
Dividend declaration
Notice is hereby given that a gross cash dividend of 105 cents per share in respect of the six
months ended 30 September 2018 has been declared payable to holders of ordinary shares.
The number of shares in issue as of the date of declaration is 83 010 692. The dividend has been
declared out of income reserves and is subject to a dividend tax of 20%. The dividend for
determining the dividend tax is 105 cents and the dividend tax payable is 21 cents for shareholders
who are not exempt. The net dividend for shareholders who are not exempt will therefore be
84 cents. The dividend tax rate may be reduced where the shareholder is tax resident in a foreign
jurisdiction which has a Double Tax Convention with South Africa and meets the requirements for
a reduced rate. The company's tax reference number is 9551/419/15/4.
The following dates are applicable to this declaration:
Last date of trade "cum" dividend Tuesday, 22 January 2019
Date trading commences "ex" dividend Wednesday, 23 January 2019
Record date Friday, 25 January 2019
Date of payment Monday, 28 January 2019
Share certificates may not be dematerialised or rematerialised between Wednesday,
23 January 2019 and Friday, 25 January 2019, both days inclusive.
For and on behalf of the board
Hilton Saven Johan Enslin
Independent non-executive Chairman Chief executive officer
Cape Town
21 November 2018
Income statement
for the six months ended 30 September 2018
6 months 6 months 12 months
ended ended ended
30 Sep 30 Sep 31 Mar
2018 2017 2018
Unaudited Unaudited Audited
Notes Rm Rm Rm
Revenue 4.1 2 904.9 2 658.6 5 556.8
Retail revenue 4.2 1 973.4 1 623.7 3 524.2
Merchandise sales 8 1 630.5 1 294.8 2 865.0
Ancillary services 342.9 328.9 659.2
Insurance revenue 326.9 356.4 671.0
Effective interest income 604.6 678.5 1 361.6
Finance charges and initiation fees earned 656.0 678.5 1 361.6
Credit impairment adjustment (51.4) - -
Cost of merchandise sales 8 (980.0) (755.5) (1 677.8)
Operating costs (1 731.1) (1 712.0) (3 499.7)
Debtor costs 3.2 (300.5) (444.3) (958.7)
Bad debts (442.6) (407.4) (959.4)
Movement in impairment provision 64.5 (64.9) (58.9)
Credit impairment adjustment 51.4 - -
Bad debt recoveries 26.2 28.0 60.3
Employment costs (565.2) (513.8) (1 059.1)
Occupancy costs (220.9) (183.4) (373.2)
Administration and IT (170.4) (164.3) (328.8)
Transport and travel (115.9) (99.1) (205.0)
Marketing (161.1) (134.0) (246.6)
Depreciation and amortisation (38.4) (43.6) (85.9)
Other operating costs (158.7) (129.5) (243.8)
Operating profit before investment income 193.8 191.1 379.3
Investment income 5.2 23.8 32.8 62.4
Profit before finance costs 217.6 223.9 441.7
Net finance costs 5.6 (15.7) (49.2)
Interest paid (34.4) (37.7) (87.6)
Interest received 19.8 21.3 38.9
Gain/(loss) on forward exchange contracts 20.2 0.7 (0.5)
Profit before taxation 223.2 208.2 392.5
Taxation 9 (72.8) (65.3) (128.4)
Net profit attributable to ordinary shareholders 150.4 142.9 264.1
Earnings per share (cents) 181.8 163.1 306.8
Diluted earnings per share (cents) 179.0 162.1 301.3
Statement of Comprehensive Income
for the six months ended 30 September 2018
6 months 6 months 12 months
ended ended ended
30 Sep 30 Sep 31 Mar
2018 2017 2018
Unaudited Unaudited Audited
Rm Rm Rm
Net profit for the year 150.4 142.9 264.1
Items that may be subsequently reclassified
to income statement:
Movement in other reserves (7.4) 6.0 9.9
Fair value adjustment to
FVOCI/available-for-sale investments (22.8) 4.6 22.8
Disposal of FVOCI/available-for-sale investments 0.3 (0.8) (1.3)
Foreign currency translation reserve 15.1 2.2 (11.6)
Items that may not be subsequently reclassified
to income statement:
Retirement benefit remeasurements - - 42.6
Other comprehensive income (7.4) 6.0 52.5
Total comprehensive income for the year
attributable to equity shareholders 143.0 148.9 316.6
Earnings and Dividends per Share
for the six months ended 30 September 2018
6 months 6 months 12 months
ended ended ended
30 Sep 30 Sep 31 Mar
2018 2017 2018
Unaudited Unaudited Audited
Weighted average number of shares
Weighted average ('000) 82 744 87 613 86 073
Diluted weighted average ('000) 84 032 88 167 87 670
Headline earnings
Attributable earnings (Rm) 150.4 142.9 264.1
Disposal of fixed assets (Rm) (0.8) 1.0 (2.4)
Profit on disposal of
available-for-sale investments (Rm) - (0.8) (1.2)
Headline earnings 149.6 143.1 260.5
Earnings per share
Earnings per share (cents) 181.8 163.1 306.8
Diluted earnings per share (cents) 179.0 162.1 301.3
Headline earnings per share
Headline earnings per share (cents) 180.8 163.3 302.6
Diluted headline earnings per share (cents) 178.0 162.2 297.1
Dividends per share
Dividends paid per share
Final dividend 2018 (2017) (cents) 100.0 100.0 100.0
Interim dividend 2019 (2018) (cents) - - 100.0
100.0 100.0 200.0
Dividends declared per share
Interim dividend 2019 (2018) (cents) 105.0 100.0 100.0
Final dividend 2018 (2017) (cents) - - 100.0
105.0 100.0 200.0
Balance sheet
for the six months ended 30 September 2018
6 months 6 months 12 months
ended ended ended
30 Sep 30 Sep 31 Mar
2018 2017 2018
Unaudited Unaudited Audited
Notes Rm Rm Rm
Assets
Non-current assets
Property, plant and equipment 304.2 319.7 301.8
Trademarks 115.9 64.4 117.8
Goodwill 187.6 5.5 187.6
Deferred taxation 156.6 26.4 10.9
Retirement benefit asset 91.1 55.0 91.1
Financial assets - insurance investments 5.1 442.9 456.3 471.0
1 298.3 927.3 1 180.2
Current assets
Inventories 750.5 523.3 579.7
Trade and other receivables 4.1 3 347.3 4 341.4 4 200.0
Reinsurance assets 5.3 - 97.6 -
Insurance premiums in advance 17.4 200.3 75.6
Taxation 171.2 166.0 136.5
Financial assets - insurance investments 5.1 133.6 244.3 135.4
Cash-on-hand and deposits 543.4 684.2 608.4
4 963.4 6 257.1 5 735.6
Total assets 6 261.7 7 184.4 6 915.8
Equity and liabilities
Capital and reserves
Share capital and premium 0.9 494.3 425.0
Treasury shares (0.5) (480.2) (480.2)
Other reserves 32.3 20.0 42.6
Retained earnings 4 805.0 5 381.4 5 461.1
4 837.7 5 415.5 5 448.5
Non-current liabilities
Long-term interest-bearing borrowings 6 - 600.0 -
Deferred taxation 34.1 79.6 121.0
Retirement benefit liability 92.6 106.8 89.8
126.7 786.4 210.8
Current liabilities
Trade and other payables 512.7 410.9 379.2
Payments in advance 161.0 137.7 168.9
Insurance and reinsurance liabilities 5.4 121.7 399.1 176.8
Short-term interest-bearing borrowings 6 501.9 34.8 531.6
1 297.3 982.5 1 256.5
Total equity and liabilities 6 261.7 7 184.4 6 915.8
Statement of Changes in Equity
for the six months ended 30 September 2018
6 months 6 months 12 months
ended ended ended
30 Sep 30 Sep 31 Mar
2018 2017 2018
Unaudited Unaudited Audited
Rm Rm Rm
Share capital and premium
Opening balance 425.0 588.5 588.5
Cost of own shares acquired (51.5) (94.2) (163.5)
Treasury shares cancelled (477.7) - -
Excess cost of cancelled shares 105.1 - -
0.9 494.3 425.0
Treasury shares
Opening balance (480.2) (480.2) (480.2)
Cost of own shares acquired (6.1) - -
Treasury shares cancelled 477.7 - -
Share awards to employees 8.1 - -
(0.5) (480.2) (480.2)
Other reserves
Opening balance 42.6 6.2 6.2
Other comprehensive income for the year
Fair value adjustments of available-for-sale
investments (22.8) 4.6 22.8
Disposal of available-for-sale investments
recognised 0.3 (0.8) (1.3)
Foreign currency translation reserve 15.1 2.2 (11.6)
Share-based payment 17.4 7.8 26.5
Transfer of share-based payment reserve to
retained earnings on vesting (20.3) - -
32.3 20.0 42.6
Retained earnings
Opening balance 5 461.1 5 325.9 5 325.9
Net profit attributable to ordinary shareholders 150.4 142.9 264.1
IFRS 9 Transitional adjustments (604.8) - -
Decrease in trade receivables:
Gross carrying value (39.3) - -
Impairment provision (802.6) - -
Deferred tax 237.1 - -
IFRS 15 Transitional adjustments (26.0) - -
Gross (36.1) - -
Deferred tax 10.1 - -
Distribution to shareholders (82.8) (87.4) (171.5)
Excess cost of cancelled shares (105.1) - -
Share awards to employees (8.1) - -
Transfer of share-based payment reserve
to retained earnings on vesting 20.3 - -
Retirement benefit remeasurements - - 42.6
4 805.0 5 381.4 5 461.1
Balance as at the end of period 4 837.7 5 415.5 5 448.5
Cash Flow Statement
for the six months ended 30 September 2018
6 months 6 months 12 months
ended ended ended
30 Sep 30 Sep 31 Mar
2018 2017 2018
Unaudited Unaudited Audited
Notes Rm Rm Rm
Cash flow from operating activities
Cash flow from trading 195.5 285.7 606.3
Operating profit before investment income 193.8 191.1 379.3
Adjusted for:
Share-based payments 17.4 7.8 26.5
Depreciation and amortisation 38.4 43.6 85.9
Movement in debtors impairment provision (64.5) 64.9 58.9
Movement in other provisions 8.8 (28.1) 47.8
Other movements 1.6 6.4 7.9
Changes in working capital: 20.0 89.4 101.9
Increase in inventories (160.7) (88.4) (27.3)
Decrease/(Increase) in trade and other receivables 37.8 (34.4) 66.8
Increase/(Decrease) in trade payables 147.7 180.6 (0.4)
Payments in advance (7.9) (6.2) 25
Decrease in insurance premiums in advance 58.2 202.9 327.6
Decrease in reinsurance asset - 54.6 152.2
Decrease in reinsurance and insurance liabilities (55.1) (219.7) (442.0)
Cash generated from operations 215.5 375.1 708.2
Interest received 44.0 54.1 99.5
Interest paid (14.2) (37.0) (88.1)
Taxation paid (84.2) (38.6) (58.5)
161.1 353.6 661.1
Cash utilised in investing activities
Net disposals of insurance business investments (1.8) 55.4 176.0
Purchase of insurance investments (63.1) (22.5) (81.5)
Disposals of insurance investments 61.3 77.9 257.5
Acquisition of property, plant and equipment (38.9) (20.8) (44.4)
Purchase of businesses 11 (16.5) - (234.6)
Proceeds on disposal of property, plant and
equipment 1.2 1.5 12.4
(56.0) 36.1 (90.6)
Cash flow from financing activities
Dividends paid (82.8) (87.4) (171.5)
Repayments of borrowings (0.9) (347.3) (422.2)
Purchase of own shares (57.6) (94.2) (163.5)
(141.3) (528.9) (757.2)
Net decrease in cash and cash equivalents (36.2) (139.2) (186.7)
Cash and cash equivalents at the beginning of the year 579.6 788.6 766.3
Cash and cash equivalents at the end of the year 543.4 649.4 579.6
Notes to the financial statements
for the six months ended 30 September 2018
1. Basis of reporting
The condensed consolidated interim financial statements are prepared in accordance
with International Financial Reporting Standards, (IAS 34 Interim Financial Reporting),
the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee
and Financial Pronouncements as issued by the Financial Reporting Standards Council.
The accounting policies applied in the preparation of these interim financial statements
are in terms of International Financial Reporting Standards and are consistent with those
applied in the previous consolidated annual financial statements except as disclosed in
note 2.
The interim financial statements were prepared by the group's Finance Department
under the supervision of the Chief Financial Officer, Mr J Bestbier CA(SA).
2. Changes in accounting policies
2.1 Adoption of IFRS 9
The group has adopted IFRS 9 with effect from 1 April 2018. The group has elected not
to restate its comparative information as permitted by IFRS 9. Accordingly, the impact of
IFRS 9 has been applied retrospectively with an adjustment to the group's opening
retained earnings on 1 April 2018. Therefore comparative information in the prior period
annual financial statements has not been amended for the impact of IFRS 9.
The major changes in accounting policies arising from the adoption of IFRS 9 can be
summarised as follows:
- the impairment of financial assets has been significantly amended by IFRS 9.
The main impact being that IFRS 9 introduces an expected credit loss model when
assessing the impairment of financial assets. The group has elected to use the
simplified model for trade receivables while the general model applies to all other
assets.
- the classification of financial instruments from IAS 39 to IFRS 9 categories. This has
had no impact in the opening earnings of the group or the carrying values of the
financial instruments.
The adjustment to opening retained earnings for the transition to the expected credit
loss model (impairment of trade receivables) as at 1 April 2018 is as follows:
Rm
Decrease in trade receivables (841.9)
Attributable deferred tax 237.1
Decrease in retained income as at 1 April 2018 (604.8)
For full details of the adoption of IFRS 9, refer to the IFRS 9 Implementation Report
included in these unaudited financial results for the six months ended 30 September 2018.
Interest income
The following change to the effective interest recognition policy was also required
following the adoption of IFRS 9:
Interest income is calculated by applying the effective interest rate to the gross carrying
value of financial assets, except for financial assets that have subsequently become
credit-impaired (or "stage 3"), for which interest income is calculated by applying the
effective interest rate to their amortised cost (i.e. gross carrying value less impairment
provision).
2.2 Adoption of IFRS 15
The group has adopted IFRS 15 with effect 1 April 2018. In adopting IFRS 15, comparative
financial information has not been restated and the impact of transitioning to IFRS 15 is
reflected as an adjustment to opening earnings as at 1 April 2018.
The effect of the adoption of IFRS 15 as at 1 April 2018 is reflected in Section 5 of the
IFRS 9 Implementation Report.
The following change to the accounting policy was required as a consequence of
transitioning to IFRS 15:
Cancelled sales
It is policy to sell goods with the right of return in terms of current consumer legislation.
Such sales are cancelled where the right of return is exercised. Under IFRS 15, a refund
liability for the expected refunds is recognised as an adjustment to revenue, trade receivables and trade payables.
The corresponding right to recover the product from the customer is an
adjustment to cost of sales and inventory. The accumulated experience of the portfolio
has been utilised to estimate such returns at the time of sale.
The adjustment to opening retained earnings as at 1 April 2018 is as follows:
Rm
Gross amount (36.1)
Reduction in trade receivables (52.7)
Increase in accounts payable (9.9)
Increase in inventory 26.5
Attributable deferred tax 10.1
Decrease in retained earnings (26.0)
2.3 Segmental report
The group's accounting policy states that the group's reportable segments are based on
the chains that it operates and that these segments reflect how the group's businesses
are managed and reported to the chief operating decision-makers. With the acquired
businesses and the development of new business ventures, the reportable segments
have changed to reflect the new strategic direction of the group.
The reportable segments are as follows:
- traditional business which consists of credit-focused brands of Lewis,
Best Home and Electric and Beares;
- cash business, being the newly acquired UFO business; and
- Omni-Channel business being newly launched INspire.
In accordance with IFRS 8, the comparatives have been prepared as if these reportable
segments were in place in the prior periods.
2.4 Share capital
The group's accounting policy regarding share capital needs to be clarified in that where
shares are cancelled, the consideration paid including the cost attributable to the
acquisition will be applied to the share premium account and once the share premium
account is fully utilised, then the excess will be allocated to retained earnings.
2.5 Reclassification
The following reclassifications were made:
Where customers have settled their accounts or where customers have paid in advance
of Lewis performing under the maintenance contract, there was a remaining period
under the said maintenance contract for which Lewis still had to provide a service. The
gross carrying value of trade receivables was reduced to the extent of the remaining
unearned maintenance income. This has now been reclassified to payments in advance
and disclosed separately under current liabilities.
Where customers have paid in advance for goods still to be delivered under the sales
contract, this was previously included in trade and other payables. This has been
reclassified as payments in advance.
The reclassifications have the following impact on trade receivables, trade and other
payables and payments in advance for the six months ended 30 September 2017 and the
year ended 31 March 2018:
September September March March
September 2017 2017 March 2018 2018
2017 Effect of Previously 2018 Effect of Previously
Restated change restated Restated change restated
Trade receivables 4 341.4 137.7 4 203.7 4 200.0 131.1 4 068.9
Trade payables - - - 379.2 (37.8) 417.0
Payments
in advance 137.7 137.7 - 168.9 168.9 -
2.6 Restatement of September 2017 financial results
In the financial statements for the year ended 31 March 2018, the group reconsidered its
accounting treatment with respect to the treatment of advertising rebates. As a result of
reconsidering the accounting policy, the group concluded that it previously incorrectly
classified these rebates , net of advertising expenses and changed the group's
accounting policy for inventory. The change in the inventory policy was implemented in
the results for the year ended 31 March 2018, but not for the six months ended
30 September 2017. Accordingly, the reclassification referred to needs to be accounted
for in the financial results for the six months ended 30 September 2017:
2017
Effect of
change
Rm
Impact on balance sheet
Inventories 7.5
Retained earnings 5.4
Deferred tax liabilities 2.1
Impact on income statement
Cost of sales (10.3)
Other operating expenses - marketing (11.0)
Attributable profit for the year (0.5)
Basic earnings per share (cents) (0.6)
Diluted earnings per share (cents) (0.5)
Basic headline earnings per share (cents) (0.6)
Diluted headline earnings per share (cents) (0.7)
Impact on statement of cash flows
Cash flow from trading (0.6)
Changes in working capital 0.6
Net movement in cash and cash equivalents -
6 months 6 months 12 months
ended ended ended
30 Sept 30 Sept 31 March
2018 2017 2018
Unaudited Unaudited Audited
Rm Rm Rm
3. Trade and other receivables
3.1 Trade receivables
Trade receivables at carrying value 5 420.7 5 717.9 5 608.7
Provision for impairment (2 357.6) (1 625.5) (1 619.5)
3 063.1 4 092.4 3 989.2
Other receivables 284.2 249.0 210.8
3 347.3 4 341.4 4 200.0
Debtors' impairment provision
as percentage of net debtors (%) 43.5 28.4 28.9
Amounts due from trade receivables after one year are reflected as current, as they form
part of the normal operating cycle. The credit terms of trade receivables range from 6 to
36 months.
Credit risk of trade receivables
Credit risk is the risk of suffering financial loss, should any of the group's customers and
counterparties fail to fulfil their contractual obligations with the group. The main credit
risk faced is that customers will not meet their payment obligations in terms of the sale
agreements concluded.
Credit granting
The group has developed advanced credit-granting systems to properly assess the
customer. The credit underwriting process flows through the following stages:
- Credit scoring: this involves the gathering of appropriate information from the client,
use of credit bureaus and third parties such as employers. These input variables are
run through the various credit scorecards. Lewis deals with its new customers and
existing customers differently when credit scoring takes place.
The process differs as follows:
- for new customers, application risk scorecards predict the risk with the emphasis
for such an evaluation on information from credit bureaus and third-party
information.
- for existing customers, behavioural scorecards have been developed to assess the
risk through predictive behaviour with the emphasis on the customer's payment
record with Lewis, bureau and other information being considered.
- Assessing client affordability: this process involves collecting information regarding
the customer's income levels, expenses and current debt obligations. Lewis has its
own priority expense model based on surveys conducted with customers in addition
to the National Credit Regulator's expense table.
- Determining the credit limit for the customer: the customer's risk score determined
by the scorecard together with the expense assessment and outstanding obligations
are used to calculate a credit limit within the customer's affordability level.
The credit granting systems enable the group to determine its appetite for risk.
In determining the acceptable level of risk, the potential loss is weighed up against the
revenue potential using the predictive behavioural models inherent in the credit-granting
system. The group monitors any variances from the level of risk that has been adopted
and adjusts the credit-granting process on a regular basis.
The group manages its risk effectively by assessing the customer's ability to service the
proposed monthly instalment. However, collateral exists in that ownership of
merchandise is retained until the customer settles the account in full.
Impairment provision
The customers payment profile is managed by using payment ratings. Payment ratings
are determined on an individual customer level and aggregated over all the customer's
sub-accounts. Payment ratings measure the customers actual payments received over
the lifetime of the account relative to the instalments due in terms of the contract. These
payment ratings are used to categorise and report on customers at the store level to
follow up the slow paying and non-performing customers.
In accordance with IFRS 9, the group has elected to measure the impairment allowance
equal to the lifetime expected credit losses ("ECL"). The lifetime ECL is calculated by
determining cash flows on a probability weighted basis and discounting these at the
effective interest rate in the contract, including initiation fees. The discounted cash flow
is compared to the balance owing at point of assessment to determine the ECL.
The probability weighted cash flows are calculated using the debtor book population's
payment behaviour in combination with a transition matrix. The transition matrix and
payment performance for each payment state has been developed utilising customer
payment history. The transition matrix predicts the population's payment behaviour and
probability of the account being in a particular payment state and transitioning into
future payment states. The key states in the transitional matrix are the customer's
lifetime payment rating, time on book and contractual term. For modelling purposes,
cash flows are forecast until the account is written off or settled.
The impairment provision applicable to the payment rating and the trending thereof, is
correlated with collection rates and customer payment data produced by the credit risk
information systems. The level of the impairment provision in terms of IFRS 9 will be
monitored in a similar manner to that of the impairment provision under IAS 39.
Contractual arrears
The key aspect of the arrear calculation is Lewis' policy not to reschedule arrears nor to
amend the terms of the original contract. In other words, the contractual arrears
calculated is the actual arrears in terms of the originally signed agreement.
From the onset of the agreement, contractual arrears is calculated by comparing
payments made life to date with the originally calculated instalments due life to date,
causing a customer who is paying less than the required contracted instalment to
immediately fall into arrears. Once the customer exceeds the term of the agreement by
paying less than the required contracted instalments, the full balance owing will be in
arrears. The group does not consider arrears the leading indicator, but rather payment
ratings for the reasons mentioned above.
Combined impairment and contractual arrears table
The table below reflects the following:
- A summary of the main groupings of payment ratings describing payment behaviour.
- For each of the main payment ratings the following is disclosed:
- Number of customers.
- Gross receivables or gross carrying value.
- Impairment provision allocated to each grouping.
- Contractual arrears for each grouping have been categorised by number of instalments in arrears.
The table refered to above as set out below:
Gross debtor analysis
30 September 2018 (IFRS 9)
Total Gross Instalments in arrears
number carrying Impairment Impairment Total
of value provision provision arrears 1 2 3 >3
Customer grouping customers R'000 R'000 % R'000 R'000 R'000 R'000 R'000
Satisfactory paid 408 005 3 103 155 666 767 21.5 530 205 148 582 102 629 75 903 203 091
Customers who have paid
70% or more of amounts due
over the contract period. 69.9% 57.2% 28.3% 24.3%
Slow payers 91 370 958 938 571 465 59.6 633 196 67 912 64 902 61 756 438 626
Customers who have paid
55% to 70% of amounts due
over the contract period. 15.6% 17.7% 24.2% 29.1%
Non-performing accounts 84 568 1 358 540 1 119 257 82.4 1 013 893 65 006 64 349 63 654 820 884
Customers who have paid
less than 55% of amounts due
over the contract period. 14.5% 25.1% 47.5% 46.6%
Gross debtor analysis 583 943 5 420 633 2 357 489 43.5 2 177 294 281 500 231 880 201 313 1 462 601
Credit impaired debtors as at 30 September 2018
No payment
Non- in three
Credit impaired performing Debt consecutive
categories accounts In duplum counselling months Total
Gross carrying value as at
30 September 2018 1 358 540 43 595 110 129 223 693 1 735 957
Impairment provision (1 119 257) (29 137) (52 573) (108 254) (1 309 221)
Amortised cost 239 283 14 458 57 556 115 439 426 736
30 September 2017 (IAS 39)
Total Instalments in arrears
number Gross Impairment Total
of receivables provision arrears 1 2 3 >3
Customer grouping customers R'000 R'000 R'000 R'000 R'000 R'000 R'000
Satisfactory paid
Customers who have paid 70% or more of 409 445 3 505 117 20 437 561 863 153 413 107 496 80 648 220 306
amounts due over the contract period. The
provision in this category results from
in duplum provision. 67.7% 56.8% 1.3%
Slow payers
Customers who have paid 65% to 70% of 52 312 529 855 195 250 324 376 37 633 36 471 34 665 215 607
amounts due over the contract period. The
provision in this category for the current
period ranges from 13% to 68% (Sept 2016: 8.6% 8.6% 12.0%
14% to 66%) of amounts due.
Non-performing accounts
Customers who have paid between 55% 45 632 557 807 248 575 359 018 33 350 31 744 30 622 263 301
and 65% of amounts due over the contract
period. The provision in this category for
the current period ranges from 23% to 79%
(Sept 2016: 24% to 78%) of amounts due. 7.5% 9.0% 15.3%
Non-performing accounts
Customers who have paid 55% or less of 97 792 1 581 455 1 161 281 1 107 033 71 012 69 576 68 415 898 031
amounts due over the contract period.
The provision in this category for the
current period ranges from 34% to 100%
(Sept 2016: 33% to 100%) of amounts due. 16.2% 25.6% 71.4%
Gross debtor analysis 605 181 6 174 234 1 625 543 2 352 290 295 408 245 286 214 306 1 597 245
Unearned provision (456 294)
28.4%
Gross carrying value 5 717 940
April 2018 (Transition to IFRS 9)
Total Gross Instalments in arrears
number carrying Impairment Impairment Total
of value provision provision arrears 1 2 3 >3
Customer grouping customers R'000 R'000 % R'000 R'000 R'000 R'000 R'000
Satisfactory paid
Customers who have 401 183 3 034 888 675 971 22.3 549 506 155 673 105 593 77 633 210 607
paid 70% or more of
amounts due over the
contract period. 68.4% 55.0% 27.9% 24.1%
Slow payers
Customers who have 97 251 1 039 846 608 716 58.5 665 893 72 167 69 010 64 474 460 242
paid 55% to 70% of
amounts due over the
contract period. 16.5% 18.9% 25.1% 29.2%
Non-performing
accounts 88 430 1 441 893 1 137 347 78.9 1 062 130 67 452 66 131 64 513 864 034
Customers who have
paid less than 55% of
amounts due over the 15.1% 26.1% 47.0% 46.6%
contract period.
Gross debtor analysis 586 864 5 516 627 2 422 034 43.9 2 277 529 295 292 240 734 206 620 1 534 883
Credit impaired debtors as at 1 April 2018
No payment
Non- in three
Credit impaired performing Debt consecutive
categories accounts In duplum counselling months Total
Gross carrying value
as at 1 April 2018 1 441 893 31 622 107 572 135 776 1 716 863
Impairment provision (1 137 347) (19 525) (54 342) (59 360) (1 270 574)
Amortised cost 304 546 12 097 53 230 76 416 446 289
31 March 2018 (IAS 39)
Total Instalments in arrears
number Gross Impairment Total
of receivables provision arrears 1 2 3 >3
Customer grouping customers R'000 R'000 R'000 R'000 R'000 R'000 R'000
Satisfactory paid 401 183 3 521 017 18 039 549 506 155 673 105 593 77 633 210 607
Customers who have paid 70% or
more of amounts due over the
contract period. The provision in this
category results from in duplum
provision. 68.4% 57.9% 1.1%
Slow payers
Customers who have paid 65% to 70% 51 311 522 578 196 021 308 975 37 594 36 230 33 546 201 605
of amounts due over the contract
period. The provision in this category
for the current period ranges from 14%
to 67% (2017: 13% to 72% ) of amounts 8.7% 8.6% 12.1%
due.
Non- performing accounts
Customers who have paid between 45 940 563 339 262 519 356 918 34 573 32 780 30 928 258 637
55% and 65% of amounts due over the
contract period. The provision in this
category for the current period ranges
from 25% to 79% (2017: 24% to 86%) 7.8% 9.3% 16.2%
of amounts due.
Non- performing accounts
Customers who have paid 55% or less 88 430 1 471 294 1 142 920 1 062 130 67 452 66 131 64 513 864 034
of amounts due over the contract
period. The provision in this category
for the current period ranges from
35% to 100% (2017: 35% to 100%) of 15.1% 24.2% 70.6%
amounts due.
Gross debtor analysis 586 864 6 078 228 1 619 499 2 277 529 295 292 240 734 206 620 1 534 883
Unearned provision (469 549)
Gross carrying value 5 608 678 28.9%
Interest rate risk
Interest rates charged to customers are fixed at the date the contract is entered into.
Consequently, there is no interest rate risk associated with these contracts during the
term of the contract.
The average effective interest rate on trade receivables is 22.7% (2017: 22.6%) and the
average term of the sale is 32.7 months (2017: 32.9 months).
Fair value
In terms of paragraph 29(a) of IFRS 7, disclosure of fair value is not required as trade
receivables form part of a normal operating cycle and the carrying value of trade
receivables is a reasonable approximation of fair value.
6 months 6 months 12 months
ended ended ended
30 Sept 30 Sept 31 March
2018 2017 2018
Unaudited Unaudited Audited
Rm Rm Rm
3.2 Debtor costs
Bad debts 442.6 407.4 959.4
Credit impairment adjustment (51.4) - -
Bad debt recoveries (26.2) (28.0) (61.0)
Movement in debtors' impairment
provision (64.5) 64.9 58.9
Closing balance 2 357.6 1 625.5 1 619.5
Transition to IFRS 9 (802.6) - -
Opening balance (1 619.5) (1 560.6) (1 560.6)
300.5 444.3 957.3
Debtor costs as a percentage
of trade receivables (%) 5.5 7.8 17.1
6 months 6 months 12 months
ended ended ended
30 Sept 30 Sept 31 March
2018 2017 2018
Unaudited Unaudited Audited
Rm Rm Rm
4. Revenue
4.1 Revenue 2 904.9 2 658.6 5 556.8
Retail revenue 1 973.4 1 623.7 3 524.2
Merchandise sales 1 630.5 1 294.8 2 865.0
Ancillary services 342.9 328.9 659.2
Insurance revenue 326.9 356.4 671.0
Effective interest income 604.6 678.5 1 361.6
Finance charges and initiation fees
earned 656.0 678.5 1 361.6
Credit impairment adjustment (51.4) - -
4.2 Retail revenue
Traditional 1 734.8 1 623.7 3 458.2
Cash retail 234.4 - 66.0
Omni-Channel 4.2 - -
1 973.4 1 623.7 3 524.2
6 months 6 months 12 months
ended ended ended
30 Sept 30 Sept 31 March
2018 2017 2018
Unaudited Unaudited Audited
Rm Rm Rm
5. Insurance
5.1 Insurance investments
Financial assets
- insurance investments
Listed investments
Fixed income securities
- FVOCI/available-for-sale 442.9 456.3 471.0
Unlisted Investments
Money market
- FVOCI/available-for-sale 133.6 244.3 135.4
576.5 700.6 606.4
Analysed as follows:
Non-current 442.9 456.3 471.0
Current 133.6 244.3 135.4
576.5 700.6 606.4
Movement for the year
Beginning of the year 606.4 750.8 750.8
Additions to investments 63.1 22.5 81.5
Disposals of investments (61.7) (77.9) (255.7)
Fair value adjustment (31.3) 5.2 29.8
End of the year 576.5 700.6 606.4
Fair value hierarchy
The following table presents the assets recognised and subsequently measured at fair
value:
Level 2 Total
Rm Rm
30 September 2018
Insurance investments:
Fixed income securities - FVOCI 442.9 442.9
Money market - FVOCI 133.6 133.6
576.5 576.5
30 September 2017
Insurance investments:
Fixed income securities - Available-for-sale 456.3 456.3
Money market - Available-for-sale 244.3 244.3
700.6 700.6
31 March 2018
Insurance investments:
Fixed income securities - Available-for-sale 471.0 471.0
Money market - Available-for-sale 135.4 135.4
606.4 606.4
The categorisation of the valuation techniques used to value the assets at fair value are
as set out in IFRS 13.
6 months 6 months 12 months
ended ended ended
30 Sept 30 Sept 31 March
2018 2017 2018
Unaudited Unaudited Audited
Rm Rm Rm
5.2 Investment income
Interest - insurance business 24.2 31.7 60.7
Realised (loss)/gain on disposal
of insurance investments (0.4) 1.1 1.7
23.8 32.8 62.4
5.3 Reinsurance assets
Reinsurer's share of unearned premiums - 67.5 -
Opening balance - 123.8 123.8
Recognised in income statement - (56.3) (100.6)
Cessation of reinsurance - - (23.2)
Reinsurer's share of insurance provisions - 30.1 -
Opening balance - 28.4 28.4
Recognised in income statement - 1.7 (13.5)
Cessation of reinsurance - - (14.9)
Total reinsurance assets - 97.6 -
5.4 Insurance and reinsurance liabilities
Unearned premiums 77.0 243.5 133.2
Opening balance 133.2 412.1 412.1
Recognised in income statement (56.2) (168.6) (278.9)
Due to reinsurers - 0.8 0.9
Other insurance and reinsurance liabilities 44.7 154.8 42.7
Opening balance 42.7 206.4 206.4
Recognised in income statement 2.0 (51.6) (125.6)
Cessation of reinsurance - - (38.1)
Total insurance and reinsurance liabilities 121.7 399.1 176.8
6. Borrowings, banking facilities and cash
6 months 6 months 12 months
ended ended ended
30 Sept 30 Sept 31 March
2018 2017 2018
Unaudited Unaudited Audited
Rm Rm Rm
Interest-bearing borrowings
Long-term
Banking facilities - 600.0 -
- 600.0 -
Short-term
Banking facilities and bond 501.9 - 502.8
Bank overdrafts - 34.8 28.8
501.9 34.8 531.6
Cash and cash equivalents
Cash on hand (543.4) (684.2) (608.4)
Net borrowings (41.5) (49.4) (76.8)
Unutilised facilities
Banking facilities 2 191.5 2 199.4 1 618.4
Domestic Medium Term Note Programme 2 000.0 2 000.0 2 000.0
4 191.5 4 199.4 3 618.4
Available facilities 4 150.0 4 150.0 3 541.6
Interest rate profile
Interest rate profile of borrowings is as
follows:
Bank borrowings at interest rates linked
to three month JIBAR. The weighted
average interest rate at the end of the
reporting period is 9.32% (2017: 9.28%) 501.9 600.0 502.8
Capital management
Net borrowings (41.5) (49.4) (76.8)
Shareholder's equity 4 837.7 5 415.5 5 448.5
Gearing ratio (%) (0.9) (0.9) (1.4)
7. Reportable segments
Traditional Cash retail Omnichannel Group
Primary Rm Rm Rm Rm
For the six months ended
30 September 2018
(Unaudited)
Revenue 2 666.3 234.4 4.2 2 904.9
Operating profit before
investment income 186.8 21.6 (14.6) 193.8
Operating margin (%) 7.0 9.2 (316.7) 6.7
Segment assets 3 690.9 93.2 24.7 3 808.8
For the six months ended
30 September 2017
(Unaudited)
Revenue 2 658.6 - - 2 658.6
Operating profit before
investment income 191.1 - - 191.1
Operating margin (%) 7.2 - - 7.2
Segment assets 4 478.7 - - 4 478.7
For the twelve months
ended 31 March 2018
(Audited)
Revenue 5 490.8 66.0 - 5 556.8
Operating profit before
investment income 383.5 (4.2) - 379.3
Operating margin (%) 7.0 (6.4) - 6.8
Segment assets 4 327.9 110.0 - 4 437.9
South Africa Namibia BLS* Group
Geographical Rm Rm Rm Rm
For the six months ended
30 September 2018
(Unaudited)
Revenue 2 425.9 246.7 232.3 2 904.9
For the six months ended
30 September 2017
(Unaudited)
Revenue 2 159.3 258.6 240.7 2 658.6
For the twelve months
ended 31 March 2018
(Audited)
Revenue 4 551.2 497.6 508.0 5 556.8
* Botswana, Lesotho and Swaziland
6 months 6 months 12 months
ended ended ended
30 Sept 30 Sept 31 March
2018 2017 2018
Unaudited Unaudited Audited
Rm Rm Rm
8. Gross profit
Merchandise sales 1 630.5 1 294.8 2 865.0
Cost of merchandise sales (980.0) (755.5) (1 677.8)
Merchandise gross profit 650.5 539.3 1 187.2
Gross profit percentage (%) 39.9 41.7 41.4
9. Taxation
Taxation charge
Normal taxation
Current year 51.8 53.8 93.5
Prior year (2.3) - (0.6)
Deferred taxation
Current year 16.0 11.5 29.8
Prior year 7.3 - (6.8)
Withholding tax - - 12.5
Taxation per income statement 72.8 65.3 128.4
Tax rate reconciliation
Profit before taxation 223.2 208.2 392.5
Taxation calculated at a tax rate of 28%
(2017: 28%) 62.5 58.3 109.9
Differing tax rates in foreign countries 1.7 3.5 4.5
Disallowances 9.6 3.5 22.8
Exemptions (6.0) - (13.9)
Prior years 5.0 - (7.4)
Withholding tax - - 12.5
Taxation per income statement 72.8 65.3 128.4
Effective tax rate (%) 32.6 31.4 32.7
10. Regulatory matters
10.1 Pending matters
The group has the following pending matters:
- Referrals by National Credit Regulator to the National Consumer Tribunal ("NCT")
Second referral (April 2016): relating to club fees and extended maintenance
contracts charged to customers.
- High Court summonses (February/April 2016)
These were summonses issued at the direction of Summit Financial Partners by
28 plaintiffs, being existing or previous customers of Lewis, relating to delivery
charges and extended maintenance contracts.
- Homechoice Application (September 2018)
Homechoice's application launched in the Western Cape High Court relates to Lewis'
INspire business and certain intellectual property rights which Homechoice alleges
Lewis has breached.
- Referral by Summit Financial Partners ("Summit") to the National Consumer
Tribunal ("NCT")
In December 2017, Summit sought leave to self-refer a complaint to the NCT
regarding the delivery fees charged by Lewis subsequent to NCR, after investigation,
declining to refer the matter to the NCT.
10.2 Progress
The following progress has been made on the pending matters in the 6 months ended
30 September 2018:
- Second Referral: On 30 April 2018, the High Court handed down judgment in Lewis'
favour with regard to the appeal by the NCR. The matter was dismissed with costs
against the NCR. The NCR has appealed the High Court's judgment, and its appeal to
the Supreme Court of Appeal will be heard in due course.
- High Court summonses: On 4 August 2017, the plaintiffs' application for leave to
amend the particulars of their claim was dismissed with a cost order being granted in
favour of Lewis. The plaintiffs have again sought to amend the particulars of their
claim and Lewis has objected thereto. The plaintiffs' second application for leave to
amend will be heard on 29 November 2018.
- Homechoice Application: Lewis has filed a notice to oppose Homechoice's
application, and has also launched its own application against Homechoice related to
a number of irregularities in the documentation of Homechoice's application. Lewis'
application will be heard in the Western Cape High Court in February 2019.
6 months 6 months 12 months
ended ended ended
30 Sept 30 Sept 31 March
2018 2017 2018
Unaudited Unaudited Audited
Rm Rm Rm
11. Purchase of businesses
Trademarks - - 55.7
Goodwill - - 182.4
Property, plant and equipment - - 4.9
Inventory - - 116.4
Trade receivables - - -
Other receivables - - 5.4
Cash and cash equivalents - - 73.0
Short term borrowings - - (0.3)
Taxation - - (8.2)
Trade and other payables - - (93.5)
Deferred tax - - (11.7)
Total consideration - - 324.1
Outflow of cash to acquire subsidiary,
net of cash acquired
Cash consideration - - 324.1
Less: Cash balances acquired - - (73.0)
Less: Deferred purchase consideration 16.5 - (16.5)
Net outflow of cash - investing activities 16.5 - 234.6
Purchase of United Furniture Outlets (2018)
On 1 February 2018, Lewis Stores Proprietary Limited ("Lewis Stores"), a wholly-owned
subsidiary of the group, obtained control of United Furniture Outlets Proprietary Limited
("UFO"), a cash furniture retailer, by acquiring 100% of the issued ordinary share capital
and voting rights and all shareholders´ claims against UFO from the shareholders.
UFO is an independent, cash furniture retailer. It sells a
variety of furniture including lounge, bedroom and dining room products. UFO is
recognised as a luxury brand with a value offering to the upper consumer spectrum,
namely LSM 9-10+. The business was established in 2004 and currently more than half of
its stores are located in Gauteng.
The total acquisition consideration was a cash amount of R324.1 million.
12. New Standards and Interpretations not yet effective
12.1 IFRS 16
IFRS 16 (Leases) replaces IAS 17 with effect from the year ending 31 March 2020. IFRS 16
will result in most leases being recognised in the statement of financial position, as the
distinction between operating and finance leases has been removed. Under the new
standard, an asset representing the right to use the leased item and a financial liability, to
pay rentals, will be recognised. The only exceptions are short-term and low-value leases.
The new standard will primarily affect the accounting for operating leases relating to
retail stores. As at the reporting date the group has non-cancellable operating lease
commitments of R555.1 million. The group has not yet determined the extent of the right
of use asset nor the liability for future payments and how this will affect profit and
classification of cash flows.
12.2 IFRS 17
IFRS 17 which replaces IFRS 4, applies to insurance contracts and reinsurance contracts.
The standard will apply to the group for the year ending 31 March 2022. Management has
not yet performed an assessment of the potential impact of the implementation of this
new standard.
Key ratios
6 months 6 months 12 months
ended ended ended
30 Sept 30 Sept 31 March
2018 2017 2018
Unaudited Unaudited Audited
Rm Rm Rm
Operating efficiency ratios
Gross profit margin (%) 39.9 41.6 41.4
Operating profit margin (%) 6.7 7.2 6.8
Number of stores at period-end 779 744 773
Number of employees (average) 8 039 8 180 8 093
Trading space (sqm) 255 829 237 728 258 463
Stock turn (annualised)* (times) 2.5 2.9 2.8
Current ratio* 3.8 6.4 3.9
Credit ratios
Credit sales (%) 57.1 68.8 65.7
Debtor costs as a % of trade receivables (%) 5.5 7.8 17.1
Debtors' impairment provision
as a percentage of trade receivables* (%) 43.5 28.4 43.9
Arrear instalments on satisfactory accounts
as a percentage of trade receivables (%) 9.8 9.8 9.8
Arrear instalments on slow-paying and
non-performing accounts as a percentage
of trade receivables (%) 30.4 31.3 30.8
Credit applications decline rate (%) 38.5 37.4 37.1
Shareholder ratios
Net asset value per share* (cents) 5 922 6 309 5 778
Gearing ratio (%) (0.9) (0.9) (1.6)
Dividend payout ratio (%) 57.0 66.6 71.1
ROE (annualised, average shareholder's equity)
- after tax* (%) 6.2 5.2 5.1
ROCE (annualised, average capital employed)
- after tax* (%) 5.4 5.0 5.1
Average return on assets (annualised, average
capital employed) - before tax* (%) 7.2 6.4 6.6
Notes:
1. All ratios are based on figures at the end of the year unless otherwise disclosed.
2. The net asset value has been calculated using 81 694 000 shares in issue (2017: 85 848 000).
3. Total assets exclude the deferred tax asset and the reinsurance asset.
4. Trade receivables refers to the gross carrying value.
5. Ratios marked with an asterisk calculated assuming that the IFRS 9, IFRS 15 and reclassifications were implemented as at 31 March 2018.
IFRS 9 IMPLEMENTATION REPORT
(AS AT 1 APRIL 2018)
1. Statement of responsibility
2. Auditor's assurance report
3. Executive summary
3.1 Objectives of the IFRS 9 Implementation Report
3.2 Introduction of IFRS 9
3.3 Impact of IFRS 9 on the group's business model and credit practices
3.4 Implementation of IFRS 9
3.5 Overview of IFRS 9 transitional impact
4. Basis of preparation, accounting policies and significant judgements
4.1 Basis of preparation
4.2 Changes in accounting policies for financial instruments
4.3 Accounting policies for financial instruments – new and amended
4.3.1. Business model assessment
4.3.2 Solely payment of principal and interest (SPPI)
4.3.3 Impairment of financial assets
4.3.3.1 Impairment of financial assets (excluding trade receivables)
4.3.3.2 Impairment of trade receivables
4.3.4 Bad debts
4.3.5 Interest income
4.4 Significant accounting estimates and judgements for financial instruments
4.4.1 Trade receivables
4.4.2 Bad debts
4.4.3 Insurance investments
5. Impact of IFRS 9, IFRS 15 and Reclassifications
5.1 Balance sheet
5.2 Statement of changes in equity
5.3 Accounts receivable
5.3.1 Trade receivables
5.3.2 Reconciliation between IAS 39 and IFRS 9
5.3.2.1 Impairment provision
5.3.3 Combined impairment and contractual arrears table for IFRS 9
5.3.4 Credit impaired trade receivables
5.4 Financial instruments – categories
5.5 Summary of adjustments
Directors' responsibility statement relating to IFRS 9 Implementation Report
as at 1 April 2018
Lewis Group Limited formally implemented new standards on 1 April 2018. The IFRS 9
Implementation Report ("Implementation Report") has been presented based on the group's
31 March 2018 financial information to illustrate the impact of implementing the new standards on
1 April 2018 (refer section 5 pages 55 to 62).
The directors of Lewis Group Limited and its subsidiaries ("the group") are responsible for the
preparation and fair presentation of the financial information set out on pages 41 to 62. The
Implementation Report sets out the effect of the adoption of new standards on the balance sheet,
statement of changes in equity and selected notes as at 1 April 2018. The directors have approved
the accounting policies applied and established that reasonable and sound judgements and
estimates have been made by management when preparing the balance sheet, statement of
changes in equity and selected notes.
Adequate accounting records and an effective system of internal controls have been maintained
to ensure the integrity of the underlying information. For the year ended 31 March 2018, internal
audit has performed a written assessment confirming the effectiveness of the group's system of
internal control and risk management, including internal financial controls. The board is satisfied
that the system of internal controls, which includes internal financial controls, operates effectively.
The Implementation Report has been prepared on the going concern basis. In assessing whether
the going concern basis is appropriate, the directors have reviewed the business of the group
together with budget and cash flows for the year to 31 March 2019 as well as the current financial
position and have no reason to believe that the group will not be a going concern for the
foreseeable future.
The group requested its external auditors, PricewaterhouseCoopers, to perform a reasonable
assurance engagement, in accordance with ISAE 3420 Assurance Engagements, in respect of the
information contained in sections 4 and 5 of the group's Implementation Report as at 1 April 2018.
The Implementation Report of the group as at 1 April 2018, has been approved by the directors
and signed on their behalf by:
H Saven J Enslin J Bestbier
Chairman Chief Executive Officer Chief Financial Officer
Cape Town
21 November 2018
Independent auditor's assurance report
to the Directors of Lewis Group Limited
An assurance report (in terms of ISAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma
Financial Information) has been issued by the Group's auditors in respect of the Pro forma financial included
in section 5 of the IFRS 9 Implementation Report. A copy of the assurance report is available for inspection
at the registered office of the company.
3. Executive summary
3.1 Objectives of the IFRS 9 Implementation Report
The objective of the IFRS 9 Implementation Report is to detail the impact of the
transition from IAS 39 to IFRS 9. Also included in this report are the adjustments relating
to the implementation of IFRS 15 and reclassifications made in order to provide a full
understanding of the impact of the new standards adopted as at 1 April 2018.
3.2 Introduction of IFRS 9
The International Accounting Standards Board (IASB) issued International Financial
Reporting Standard 9 - Financial Instruments (IFRS 9), effective for the group for the
financial year ending 31 March 2019. IFRS 9 replaces IAS 39 - Financial Instruments:
Recognition and Measurements (IAS 39). Lewis Group formally transitioned to IFRS 9 on
1 April 2018. This Implementation Report is based on the group's 31 March 2018 financial
information to illustrate the impact of implementing IFRS 9 on 1 April 2018.
The objective of IFRS 9 is to establish principles for the reporting of financial assets and
financial liabilities in particular relating to the classification and measurement of financial
assets, hedging and the introduction of the expected credit loss (ECL) impairment
provisioning model. The most significant impact of IFRS 9 on the group therefore relates
to the implementation of the ECL impairment model on the measurement of receivables.
This disclosure document explains the new ECL methodology, its implications for the
group and the main judgements the group has made.
In terms of IAS 39, receivables measured at amortised cost were impaired when there
was objective evidence of default as a result of events that occurred after the initial
recognition. Therefore the incurred loss model applied. IFRS 9 introduces an ECL
model which is forward looking. In terms of the transitional requirements of IFRS 9, the
group has elected not to restate prior periods but to adjust the opening retained
earnings as at 1 April 2018.
The financial impact on the group of IFRS 9 and IFRS 15 adjustments as at 1 April 2018 is as follows:
Group retained earnings Impairment provision (pre-tax)
-R631 million +R803 million
(R878 million pre-tax)
3.3 Impact of IFRS 9 on the group's business model and credit practices
The adoption of IFRS 9 does not impact on the group's credit management practices
and business model. The group's credit management strategies will continue to be
consistently applied under IFRS 9. The key elements being:
Credit granting
The group has advanced credit granting systems to properly assess the customer. This
includes risk scorecards for new customer applications and behavioural scorecards for
existing customers. Processes to assess client affordability and to determine credit limits
are supported by comprehensive interviews by the store manager and a head office
compliance call centre.
Credit collections
Lewis operates a decentralised credit collection process with store based follow up.
A fully integrated information system supports the administration of the store
collection process.
Debtor performance management
The customer's payment performance is managed using payment ratings. Payment
ratings measure the customer's actual payments received over the lifetime of the
account relative to the instalments due in terms of the contract. These payment ratings
are used to categorise customers and drive the follow up of slow paying and non-
performing customers at store level. The payment rating remains integral to the
calculation of the debtor's impairment provision. The estimated cash flows are projected
utilising the payment ratings which are key to the ultimate cash recovery expected from
each individual customer. The payment behaviour of the debtors book is continuously
monitored by senior management to analyse and assess the state of the debtors book
and identify trends early. The key indicators reviewed include the following:
Number of satisfactorily paid customers
The key operational objective is to have as many satisfactory paid customers as possible.
Satisfactory paid customers are the source of future repeat business and one of the core
strengths of the business model.
Level of impairment provision
The impairment provision applicable to the payment rating and the trending thereof, is
correlated with collection rates and customer payment data produced by the credit risk
information systems. Going forward the level of the impairment provision in terms of
IFRS 9 will be monitored in a similar manner to that of the impairment provision under
IAS 39.
Contractual arrears
It is Lewis' policy not to reschedule arrears nor to amend the terms of the original
contract. The arrears presented in this document are the actual contractual arrears in
terms of the original agreement. A customer who is paying less than the required
contracted instalment immediately falls into arrears and once the customer exceeds the
term of the agreement by paying less than the required contracted instalments, the full
balance owing falls into arrears.
Write-off policy
Accounts in default are written off where the customer's payment behaviour cannot be
rehabilitated after all reasonable commercially and economically appropriate collection
methods have been utilised and exhausted. Bad debts result where the customer's
account balance has been written off or the goods repossessed. The decision to write off
takes into account, where applicable, the payment rating, recent payment behaviour, the
number of arrear instalments, whether the customer has exceeded the contractual term
and the age on book of the account.
3.4 Implementation of IFRS 9
An effective governance and control framework has been in place during the transition
to IFRS 9. The group established an Implementation Committee with representation from
all relevant departments reporting directly into the Audit Committee. The committee
focused on the development of predictive cash flow models, impairment methodologies,
output validation, testing and analysis. The ECL cash flow and impairment methodology
has been developed with the necessary input from expert service providers.
PricewaterhouseCoopers has performed a reasonable assurance engagement in
accordance with ISAE 3420 Assurance Engagement in respect of the compilation of the
information contained in sections 4 and 5 of the group's Implementation Report.
The key judgements made by the group upon the implementation of IFRS 9 have been
approved by the Board through the IFRS 9 sub-committee of the Audit Committee.
Ongoing decision-making is governed by the appropriate work group forum, which has
been enabled to implement IFRS 9. IFRS 9 outlines a three stage general or a two stage
simplified model.
General model
Stage 1
Performing accounts which have not deteriorated significantly in credit risk since
origination have a 12-month ECL provision.
Stage 2
Accounts which have experienced a significant increase in credit risk since origination
have a lifetime ECL provision.
Stage 3
Accounts where there is objective evidence of credit impairment, recognise interest at
the effective interest rate on the gross carrying value less impairment provision.
Simplified model
Stage 2
IFRS 9 allows for a simplified model which eliminates the need to calculate the 12-month
ECL provision for stage 1 accounts. Lewis has elected to apply for the simplified model for
trade receivables and recognises expected credit losses over the lifetime of the trade
receivable at initial recognition.
Stage 3
The criteria for stage 3 credit impaired accounts is consistent with internal credit risk
management practices. These are:
- accounts which are non-performing;
- accounts within the ambit of the in duplum rule;
- accounts under debt counselling;
- accounts where the customer has missed three full consecutive instalments.
Impairment methodology
The lifetime ECL is calculated by determining cash flows on a probability weighted basis
and discounting these at the effective interest rate in the contract, including initiation
fees. The discounted cash flow is compared to the balance owing at point of assessment
to determine the ECL.
The probability weighted cash flows are calculated using the debtor book population's
payment behaviour in combination with a transition matrix. The transition matrix and
payment performance for each payment state has been developed using the group's
customer payment history. The transition matrix predicts the population's payment
behaviour and probability of the account being in a particular payment state and
transitioning into future payment states. The key states in the transitional matrix are the
customer's lifetime payment rating, time on book and contractual term. For modelling
purposes, cash flows are forecast until the account is written off or settled.
An economic overlay model was applied. The adjustment required was immaterial.
3.5 Overview of IFRS 9 transitional impact
The total balance sheet impairment provision increased by R803 million from R1.6 billion
as at 31 March 2018 to R2.4 billion as at 1 April 2018. This is mainly driven by an increase
in impairment of R658 million in the satisfactory category of accounts due to the forward
looking nature of the expected loss provisioning methodology. The table below illustrates
the impact of transitioning from IAS 39 to IFRS 9. Going forward, trade receivables will
be reflected at gross carrying value which means that receivables will be presented after
deducting the unearned provisions. Refer note 5.3 and the tables overleaf:
IFRS 9
Total Gross
Number carrying Impairment Total
of value provision arrears
1 April 2018 customers R'000 R'000 R'000
Customers fully up
to date including 401 183 3 034 888 675 971 549 506
those who have
Satisfactory paid 70% or more
paid of amounts due
over the contract 68.4% 55.0% 27.9% 24.1%
period
Customers who
have paid between 97 251 1 039 846 608 716 665 893
Slow 70% and 55% of
payers amounts due over
the contract 16.5% 18.9% 25.1% 29.3%
period
Customers who 88 430 1 441 893 1 137 347 1 062 130
Non- have paid 55% or
performing less of amounts
accounts due over the
contract period 15.1% 26.1% 47.0% 46.6%
Total 586 864 5 516 627 2 422 034 2 277 529
Gross carrying value 5 516 627 43.9%
The group has re-assessed its categories and aligned them with internal credit
management policies. As a consequence of this re-assessment, the previously non-
performing category where customers have paid between 55% and 65% of amounts due
has been included with the slow paying customer category.
IAS 39 Total
Number Gross Impairment Total
of receivables provision arrears
31 March 2018 customers R'000 R'000 R'000
Customers fully up
to date including 401 183 3 521 017 18 039 549 506
those who have
Satisfactory paid 70% or more
paid of amounts due
over the contract 68.4% 57.9% 1.1% 24.1%
period
Customers who
have paid between 51 311 522 578 196 021 308 975
Slow 70% and 65% of
payers amounts due over
the contract
period 8.7% 8.6% 12.1% 13.6%
Customers who
have paid between 45 940 563 339 262 519 356 918
Non- 65% and 55% of
performing amounts due over
accounts the contract
period 7.8% 9.3% 16.2% 15.7%
Customers who 88 430 1 471 294 1 142 920 1 062 130
Non- have paid 55% or
performing less of amounts
accounts due over the
contract period 15.1% 24.2% 70.6% 46.6%
Total 586 864 6 078 228 1 619 499 2 277 529
Unearned provisions (469 549)
Gross carrying value 5 608 679 28.9%
4. Basis of preparation, accounting policies
and significant judgements
4.1 Basis of preparation
The group has adopted IFRS 9 with effect from 1 April 2018, accordingly accounting
policies have been aligned with the requirements of IFRS 9. In adopting IFRS 9,
comparative financial information has not been restated. The impact of transitioning is an
adjustment to opening reserves as at 1 April 2018.
The impact of the adoption of IFRS 9 has been detailed and quantified below. Section 5
also includes the impact of IFRS 15 and reclassifications in addition to IFRS 9.
Section 4.2: Changes in accounting policies for financial instruments
This provides a summary of the key changes in the accounting policies resulting from the
adoption of IFRS 9.
Section 4.3: Accounting policies for financial instruments
This details the new and amended accounting policies for financial instruments as a
result of the transition to IFRS 9.
Section 4.4: Significant accounting estimates and judgements for financial
instruments
This section details the significant judgements exercised and estimates made
on application of the financial instrument policies adopted with the transition
to IFRS 9.
Section 5: Impact of IFRS 9, IFRS 15 and Reclassifications
This section sets out adjustments and disclosures required in terms of the transitional
guidance provided in IFRS 9. Other adjustments for IFRS 15 and reclassifications are also
included. Reconciliations between the financial information as at 31 March 2018 and the
financial information as at 1 April 2018 as a result of the implementation of IFRS 9, IFRS 15
and reclassifications are provided.
The group's balance sheet, statement of changes in equity and selected notes in the
Implementation Report have been prepared on the historical cost basis with the
exception of financial assets measured at fair value through other comprehensive income and
financial assets and liabilities that are either required or have been elected to be fair
value through profit and loss.
4.2 Changes in accounting policies for financial instruments
The major changes in accounting policies arising from the adoption of IFRS 9 can be
summarised as follows:
- the impairment of financial assets has been significantly amended by IFRS 9.
The main impact being that IFRS 9 introduces an expected credit loss model when
assessing the impairment of financial assets. The group has elected to use the
simplified model for trade receivables while the general model applies to all other
financial assets. The approach to the impairment of financial assets and the
underlying models (i.e. general and simplified models) appear in the following notes:
- Impairment of financial assets, excluding trade receivables (section 4.3.3.1)
- Impairment of trade receivables (section 4.3.3.2)
- the classification of financial instruments and corresponding accounting treatment
has been amended by IFRS 9. The classification and corresponding accounting
treatment appear in the following notes:
- Business Model Assessment (section 4.3.1)
- Solely payment of principle and interest (SPPI) (section 4.3.2)
- bad debts policy as it is a requirement of IFRS 9 to write off the asset when there is
no reasonable expectations of recovery (section 4.3.4)
- interest income policy to cater for the requirements of IFRS 9 that the effective
interest rate on credit impaired assets must be applied to its amortised cost
i.e. gross carrying value less impairment provision (section 4.3.5).
4.3 Accounting policies for financial instruments
- new and amended due to IFRS 9
Accounting policies related to financial instruments have been significantly amended as a
consequence of the implementation of IFRS 9. The following significant changes to the
accounting policies for financial instruments have been made:
4.3.1 Business model assessment
For debt instruments, IFRS 9 requires that a business model assessment is carried out
which reflects how the group manages the assets in order to generate cash flows.
The assessment is at a portfolio level which is the level at which the portfolio is
managed. Factors considered in determining the business model for a group of assets
include past experience on how cash flows were collected, how the assets'
performance is evaluated and reported, risks that affect the assets performance and
how these risks are assessed and managed and the reasons, frequency, volume of
timing of sales in prior periods.
With the adoption of IFRS 9, debt instruments have been classified into the following
categories:
- Amortised cost
- Fair value through other comprehensive income ("FVOCI")
- Fair value through profit and loss ("FVTPL")
The group's business models for managing debt instruments and the contractual cash
flow characteristics of the debt instruments determine the following categories:
Amortised cost (hold to collect):
Financial assets within a business model whose objective is solely to hold assets
to collect contractual cash flows and the contractual terms of these assets are solely
payments of principal and interest (refer section 4.3.2).
FVOCI (hold to collect and sell):
Financial assets held within a business model whose objective is both to hold these
assets to collect contractual cash flows and to sell these assets and that the
contractual terms of financial assets are solely payments of principal and interest.
(refer section 4.3.2)
FVTPL (hold to sell/manage in a fair value basis):
Financial assets are held within a business model where the objective is to sell and
manage these assets on a fair value basis. In addition, financial assets can also be
included in this category if:
- the use of this classification removes or significantly reduces an accounting
mismatch;
- financial assets which do not meet the criteria for amortised cost or FVOCI.
The group has no equity investments and, therefore, the irrevocable election
to present an equity investment as FVOCI in paragraph 5.7.5 of IFRS 9 is not
applicable.
4.3.2 Solely payment of principal and interest (SPPI)
Where the business model is to hold assets to collect contractual cash flows or to
collect contractual cash flows and sell, the group assesses whether the assets' cash
flows represent solely payments of principal and interest (the SPPI test). In making this
assessment, the group considers whether the contractual cash flows are consistent
with a basic lending arrangement. Where the contractual terms are inconsistent with a
basic lending arrangement, the asset is classified and measured at FVTPL.
4.3.3 Impairment of financial assets
4.3.3.1 Impairment of financial assets (excluding trade receivables)
The expected credit loss ("ECL") model applies to financial assets classified at
amortised cost and/or FVOCI. ECL is a probability weighted estimate of losses.
A credit loss is the difference between the cash flows that are due to the entity in
accordance with the contract and the cash flows it expects to receive, discounted at
the original effective interest rate implicit in the financial asset.
The general model for impairment is recognised as follows:
Stage 1
ECL is recognised on initial recognition and measured at an amount equal to the
portion of lifetime expected credit losses that result from default events possible
within the next 12 months.
Stage 2
At each reporting date the group assesses whether there has been a significant
increase in credit risks ("SICR") since initial recognition. Where evidence exists that
there has been a SICR, the ECL is based on expected credit losses over the lifetime of
the asset.
Stage 3
Financial assets become credit impaired as a result of a default loss event that has
occurred after initial recognition. ECL is based on estimated credit losses over the
lifetime of the account. For these credit impaired assets, the interest or return on these
assets are calculated on the amortised cost. Amortised cost is defined as the gross
carrying value on initial recognition (adjusted for any modifications) less the
impairment provision.
The impairment gains or losses are presented as follows:
- for amortised cost assets, through the income statement
- for debt instruments classified as FVOCI, through the income statement
4.3.3.2 Impairment of trade receivables
The group's trade receivables are amounts due from customers for merchandise sold
or services performed in the ordinary course of business. These receivables contain a
significant financing component with terms of business varying from 6 to 36 months,
and a significant portion conducted on 36 months.
In accordance with paragraph 5.5.15(a)(ii), the group has elected to measure the
impairment allowance at an amount equal to the lifetime expected credit losses.
This policy will be applied to all trade receivables.
The impact of the election is to recognise the impairment provision at stage 2
(refer section 4.3.3.1 above) on initial recognition of the trade receivable.
The ECL is a probability weighted estimate and represents the difference between the
cash flow that is due to the entity in accordance with the contract and the cash flows
the entity expects to receive, discounted at the original effective interest rate
(contractual interest rate and initiation fee included in the customer contract).
Where trade receivables have become credit impaired as a result of loss events that
have occurred after initial recognition, those receivables are classified as stage 3
(refer section 4.3.3.1 above). The effective interest recognised on these assets is
calculated on the amortised cost being defined as gross carrying value on initial recognition
(adjusted for any modification) less the impairment provision.
4.3.4 Bad debts
The group writes off trade receivables when it has exhausted all practical recovery
efforts and has concluded that there is no reasonable expectation of recovery.
4.3.5 Interest income
Interest income is calculated by applying the effective interest rate to the gross
carrying value of financial assets except for financial assets that have subsequently
become credit-impaired (or "stage 3") for which interest revenue is calculated by
applying the effective interest rate to their amortised cost (i.e. gross carrying value
less impairment provision).
4.4 Significant accounting estimates and judgements for financial instruments
4.4.1 Trade receivables
1. Business model
Trade receivables are amounts due from customers for merchandise sold or
services performed in the ordinary course of business. These receivables contain a
significant financing component with terms of business varying from 6 to 36
months, and a significant portion of the business being conducted on 36 months.
Trade receivables are held to collect contractual cash flows and the contractual
terms of the trade receivables are solely payments of principal and interest.
Accordingly, the assessment of the business model is that of holding to collect and,
therefore, trade receivables are accounted for on an amortised cost basis.
2. Modifications
The ECL is calculated with reference to the original contract with the customer.
No modifications are made to the contract or the contractual cash flows as
contemplated by IFRS 9. Cash flows may be renegotiated for credit management
purposes, however, the contractual terms and contractual cash flows agreed with
the customer remain unchanged.
3. Impairment modelling
3.1 Probability weighted cash flows
In accordance with paragraph 5.5.15(a)(ii) of IFRS 9, the group has elected to apply
the simplified model and measures the impairment allowance at an amount equal
to lifetime expected credit losses. This policy has been applied to all trade
receivables. Lifetime expected credit losses are assessed by determining cash
flows on a probability weighted basis and discounting these at the effective
interest rate including initiation fees.
The probability weighted cash flows are calculated using the trade receivables
population payment behaviour in combination with transition matrices and
conditional probabilities. The transition matrix and payment performance for each
payment state has been developed using the group's customer payment history.
The transition matrix predicts the population's payment behaviour and probability
of the account being in a particular payment state and transitioning into future
payment states. The key states in the transitional matrix are the following:
- customer's lifetime payment rating which measures the customer's actual
payments received over the lifetime of the account relative to the contractual
instalments due
- age of the account
- term of the contract
For each term, lifetime payment rating and age, the transitional matrix maps the
probability of an account transitioning into future lifetime payment ratings for the
remaining months on book. Cash flows are forecast until the account is settled or
written off.
3.2 Economic overlay
An economic overlay has been developed by performing a regression analysis
between key economic variables with reference to the non-performing category
over a five-year period (customers who have paid 55% or less of amounts due over
the contract period). Three economic variables were identified as having statistical
significance:
- Nominal effective exchange rate of the rand (basket of 20 currencies)
- Prime overdraft rate
- Unemployment rate
A base, high and low scenarios using the economic variables above are determined
and a weighted average scenario prepared. This is compared to the base position
and an appropriate adjustment is made to the whole trade receivables book. The
adjustment as at the date of transition was immaterial.
4. Credit impaired (stage 3)
The criteria for credit impaired accounts (i.e. when the account moves to stage 3
as a result of loss events that have occurred after initial recognition) are as follows:
- Non-performing accounts (i.e. customers who have paid 55% or less of the
amounts due over the contract period)
- In duplum accounts
- Debt counselling accounts
- As a backstop, accounts not included in the above categories, where no
payment has been received over the last three consecutive months
A credit impaired account will cure when the customer does not meet the criteria
for being a credit impaired account. For a customer to cure a significant
improvement in the customer's payment behaviour is required.
With regard to credit impaired accounts, interest income is recognised by applying
the effective interest rate to the amortised cost, i.e. gross carrying value less
impairment provision, resulting in lower interest revenue.
5. Unpaid Insurance
Unearned and unpaid insurance receivables of R375.2 million has been included in
trade receivables. Impairment of R 170.1 million relating to insurance receivables has
been included in the impairment provision for trade receivables. Insurance
receivables are recognised and measured in terms of IFRS 4 Insurance Contracts
and the group has not amended its polciies for the measurement of IFRS 4. The
insurance receivables are therfore excluded from the scope of IFRS 9's expected
credit loss impairment.
4.4.2 Bad debts
A store based collection system allows the collection staff to deal with customers face
to face, thus maximising collections and minimising debtor's costs.
Bad debt write-offs take place at the end of each reporting period (i.e. September and
March). Bad debt write-offs take place where accounts are in default and the
customer's payment behaviour cannot be rehabilitated after all reasonable
commercially and economically appropriate collection methods have been utilised and
exhausted. The bad debt write-offs are initiated where payment behaviour is poor in
the three months preceding the write-off for the following categories:
- customers significantly in arrears
- non-performing customers in terms of the business' credit management practices
- customers with old out-of-term accounts
Strong collection drives precede the write-offs and there is no reasonable prospect of
significant recoveries once the customer account has been written off.
4.4.3 Insurance investments
The group holds the following investments:
- fixed income securities
- money market investments
From a business model assessment, these assets are held to collect the contractual
cash flows and to sell the assets. The fixed income securities and money market
investments meet the SPPI test and are accounted for at FVOCI.
Fixed income securities are almost entirely risk-free government bonds or
government-guaranteed securities. Money market investments are invested with
credit-worthy financial institutions. Both foreign and local credit ratings are monitored
to assess credit-worthiness. There is no expectation of any significant losses arising
from these investments.
5. Impact of IFRS 9, IFRS 15 and Reclassifications
The information set out below reflect the following:
- The amounts reported in the audited group financial statements for the year ended
31 March 2018.
- IFRS 9 Adjustments relating to the transition to IFRS 9 on 1 April 2018.
("IFRS 9 Adjustments"). These relate to the adoption of the expected credit loss
model ("ECL"). Refer section 5.5.
- Reclassification in terms of IFRS 9 has been addressed in section 5.4.
- Adjustments relating to the transition to IFRS 15 on 1 April 2018 and reclassifications.
Details of these adjustments are set out in section 5.5.
- The transitioned balance sheet, statement of changes in equity and selected notes
as at 1 April 2018.
5.1 Impact on Balance Sheet as at 1 April 2018
Group Group
31 March IFRS 9 Other 1 April
2018 Adjustments Adjustments 2018
Rm Rm Rm Rm
Assets
Non-current assets
Deferred taxation 10.9 145.8 10.1 166.8
Financial assets
- insurance investments 471.0 471.0
Other non-current assets 698.3 698.3
Current assets
Inventories 579.7 26.5 606.2
Trade and other receivables 4 068.9 (841.9) 78.4 3 305.4
Financial assets
- insurance investments 135.4 135.4
Other current assets 820.5 820.5
Total assets 6 784.7 (696.1) 115.0 6 203.6
Equity and liabilities
Capital and reserves 5 448.5 (604.8) (26.0) 4 817.7
Liabilities
Deferred taxation 121.0 (91.3) 29.7
Trade and other payables 417.0 (27.9) 389.1
Payments in advance 168.9 168.9
Other liabilities 798.2 798.2
1 336.2 (91.3) 141.0 1 385.9
Total equity
and liabilities 6 784.7 (696.1) 115.0 6 203.6
5.2 Impact on Statement of Changes in Equity as at 1 April 2018
Group Group
31 March IFRS 9 Other 1 April
2018 Adjustments Adjustments 2018
Rm Rm Rm Rm
Share capital and premium 425.0 425.0
Treasury shares (480.2) (480.2)
Other reserves 42.6 42.6
Retained earnings 5 461.1 (604.8) (26.0) 4 830.3
Balance at 1 April 2018 5 448.5 (604.8) (26.0) 4 817.7
5.3 Impact on accounts receivable as at 1 April 2018
5.3.1 Trade receivables
Group Group
31 March IFRS 9 Other 1 April
2018 Adjustments Adjustments 2018
Rm Rm Rm Rm
Trade receivables at
gross carrying value 5 477.6 (39.3) 78.4 5 516.7
Provision for impairment (1 619.5) (802.6) (2 422.1)
Trade receivables at
amortised cost 3 858.1 (841.9) 78.4 3 094.6
Other receivables 210.8 210.8
4 068.9 (841.9) 78.4 3 305.4
Debtors' impairment
provision as % of trade
receivables 29.6% 43.9%
5.3.2 Reconciliation between IAS 39 and IFRS 9
5.3.2.1 Impairment provision
Group Group
31 March Category IFRS 9 1 April
2018 Adjustments Adjustments 2018
R'000 R'000 R'000 R'000
Satisfactory paid 18 039 657 932 675 971
1.1% 27.9%
Slow payers 196 021 262 519 150 176 608 716
12.1% 25.1%
Non-performing 262 519 (262 519) -
accounts 16.2% 0.0%
Non-performing 1 142 920 (5 573) 1 137 347
accounts 70.6% 47.0%
Total 1 619 499 - 802 535 2 422 034
The group has re-assessed its categories and aligned them with internal credit
management policies. As a consequence of this re-assessment, the previously non-
performing category where customers have paid between 55% and 65% of amounts due,
has been included with the slow paying customer category.
5.3.3 Combined impairment and contractual arrears table for IFRS 9
The table reflects the following:
- a summary of the main groupings of payment ratings describing payment behaviour.
- for each of the main groupings of payment ratings, the following is disclosed:
- Number of customers.
- The gross carrying value of trade receivables.
- Impairment provision allocated to each grouping.
- Contractual arrears for each grouping have been categorised by number
of instalments in arrears.
Gross trade receivable analysis restated for IFRS 9
Gross Instalments in arrears
Total carrying
number value of Impairment Impairment Total
1 April of receivables provision provision arrears 1 2 3 >3
2018 customers R'000 R'000 % R'000 R'000 R'000 R'000 R'000
401 183 3 034 888 675 971 22.3% 549 506 155 673 105 593 77 633 210 607
Satisfactory
paid 68.4% 55.0% 27.9% 24.1%
97 251 1 039 846 608 716 58.5% 665 893 72 167 69 010 64 474 460 242
Slow
payers 16.5% 18.9% 25.1% 29.3%
Non- 88 430 1 441 893 1 137 347 78.9% 1 062 130 67 452 66 131 64 513 864 034
performing
accounts 15.1% 26.1% 47.0% 46.6%
Total 586 864 5 516 627 2 422 034 43.9% 2 277 529 295 292 240 734 206 620 1 534 883
Definitions for customers payment categories
Satisfactory paid
Customers who have paid 70% or more of amounts due over the contract period.
Slow payers
Customers who have paid 55% to 70% of amounts due over the contract period.
Non-performing accounts
Customers who have paid 55% or less of amounts due over the contract period.
5.3.4 Credit impaired trade receivables
No payment
Non- in three
Credit impaired performing Debt consecutive
categories accounts In duplum counselling months Total
Gross carrying
value as at
1 April 2018 1 441 893 31 622 107 572 135 776 1 716 863
Impairment
provision (1 137 347) (19 525) (54 342) (59 360) (1 270 574)
Amortised cost 304 546 12 097 53 230 76 416 446 289
These are accounts that have moved into stage 3 as a result of loss events that have
occurred after initial recognition and are presented at gross carrying value and amortised
cost.
5.4 Reclassification of financial assets on adoption of IFRS 9
On the date of initial application, 1 April 2018, the financial assets of the group were
reclassified in terms of IFRS 9 as follows:
Measurement category Carrying value
Original New Original New Difference
IAS 39 IFRS 9 Rm Rm Rm
Non-current
financial assets
Insurance Available-
investments for-sale FVOCI 471.0 471.0 -
Current financial assets
Trade and other Loans and Amortised
receivables receivables cost 4 068.9 3 305.4 763.5
Cash on hand Amortised Amortised
and on deposit cost cost 608.4 608.4 -
Insurance Available-
investments for-sale FVOCI 135.4 135.4 -
5.5 Summary of adjustments
1. IFRS 9 Expected Credit Loss Model
The impairment of trade receivables has been significantly amended by IFRS 9 with the
introduction of an expected credit loss model. The group has elected to use the
simplified model for trade receivables which recognises the expected credit losses over
the life of the account on initial recognition. The adjustment to opening retained earnings
for the transition to the expected credit loss model as at 1 April 2018 is as follows:
Rm
Decrease in trade receivables (841.9)
Gross carrying value (39.3)
Impairment provision (802.6)
Attributable deferred tax 237.1
Decrease in retained income as at 1 April 2018 (604.8)
2. IFRS 15 - Cancelled Sales
It is policy to sell goods with the right of return in terms of current consumer legislation.
Such sales are cancelled where the right of return is exercised. Under IFRS 15, a refund
liability for the expected refunds is recognised as an adjustment to revenue, trade receivables and trade
payables. The corresponding right to recover the product from the customer is an
adjustment to cost of sales and inventory. The accumulated experience of the portfolio
has been utilised to estimate such returns at the time of sale.
The adjustment to opening retained earnings as at 1 April 2018 is as follows:
Rm
Gross amount (36.1)
Reduction in trade receivables (52.7)
Increase in trade payables (9.9)
Increase in inventory 26.5
Attributable deferred tax 10.1
Decrease in retained income 26.0
3. Reclassifications
The following reclassifications were made:
Where customers have settled their accounts or where customers have paid in advance
of Lewis' performing under the maintenance contract, there was a remaining period
under the said maintenance contract for which Lewis still had to provide a service.
Previously, the gross carrying value of trade receivables was incorrectly reduced to the extent
of the remaining unearned maintenance income. This has been reclassified to payments
in advance and disclosed separately under current liabilities.
Where customers have paid in advance for goods still to be delivered under the sales
contract, this was previously included in trade and other payables. This has been
reclassified as payments in advance.
The reclassifications have the following impact on trade receivables and trade and other
payables and payments in advance as at 31 March 2018:
Rm
Increase in trade receivables 131.1
Decrease in trade payables 37.8
Payments in advance 168.9
Corporate information
Non-executive directors: Hilton Saven (Independent non-executive chairman),
Fatima Abrahams, Adheera Bodasing, Daphne Motsepe,
Alan Smart, Duncan Westcott
Executive directors: Johan Enslin (chief executive officer)
Jacques Bestbier (chief financial officer)
Company secretary: Ntokozo Makomba
Transfer secretaries: Computershare Investor Services (Pty) Ltd; 7 Rosebank Towers,
15 Biermann Ave, Rosebank, Johannesburg, 2196; PO Box 61051,
Marshalltown, 2107
Auditors: PricewaterhouseCoopers Inc.
Registered office: 53A Victoria Road, Woodstock, 7925
Registration number: 2004/009817/06
www.lewisgroup.co.za
Johannesburg
21 November 2018
Debt Sponsor
Absa Bank Limited (acting through its Corporate and Investment Bank division)
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