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SHOPRITE HOLDINGS LIMITED - Implementation of IFRS 16: Leases

Release Date: 14/02/2020 13:38
Code(s): SHP     PDF:  
 
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Implementation of IFRS 16: Leases

SHOPRITE HOLDINGS LIMITED 

(Reg. No. 1936/007721/06)

(ISIN: ZAE 000012084)

(JSE Share code: SHP)

(NSX Share code: SRH)

(LuSE Share code: SHOPRITE)

("Shoprite Holdings" or "the Group")


IMPLEMENTATION OF IFRS 16: LEASES


The purpose of this announcement is to communicate Shoprite Holdings' 

adoption of IFRS 16: Leases (IFRS 16) effective for financial years 

beginning on or after 1 January 2019. The Group hereby publishes its 

restated 30 June 2019 financial results accordingly. 



IFRS 16 is a new financial reporting standard on leases replacing the 

previous IAS 17: Leases (IAS 17), requiring an accounting change. The main 

objective of IFRS 16 is to recognise and reflect a company's lease 

obligations in its financial statements by aligning the accounting and 

presentation of operating leased assets with those of owned and finance 

leased assets. 



The Group has adopted the new standard with effect from 1 July 2019 using 

the full retrospective approach. Accordingly, the Group's 30 June 2019 

comparative financial results have been restated from a transition date of 

2 July 2018. 



IFRS 16 has a significant impact on the presentation and classification of 

the statement of comprehensive income, statement of financial position, the 

statement of cash flows and certain key performance metrics. However, it has 

no impact on the Group's underlying economic model, revenue or net cash 

flow. 



The application of IFRS 16 requires the majority of the Group's leased 

property, vehicles, machinery and equipment and other small item leased 

assets to be brought onto the statement of financial position in accordance 

with the aforementioned approach. The Group has elected not to recognise 

right-of-use assets and lease liabilities for low-value assets and 

short-term leases. The Group defines low-value assets, as assets with a cost 

price below R75 000. Low-value assets comprise IT equipment. Short-term 

leases comprise equipment and vehicle leases with a term of 12 months or 

less.



On the statement of financial position, IFRS 16 requires the recognition of 

a lease liability and a corresponding right-of-use asset. At the 

commencement date of a qualifying lease, the lease liability and 

corresponding asset are raised by discounting future lease payments. 

Management uses the rate implicit in the lease for vehicle leases and the 

lessee's incremental borrowing rate for all other leases. Whilst the lease 

liability and right-of-use asset are initially recognised at the same value, 

except in the case of prepaid leases, they reduce differently over the lease 

term as explained herein. 



On the statement of comprehensive income, IFRS 16 replaces the previously 

recognised straight-line rental expense required under IAS 17 with a 

straight-line depreciation charge over the shorter of the underlying assets' 

useful life and the lease term. The right-of-use asset therefore reduces by 

the depreciation charge. The IFRS 16 lease liability results in an implied 

interest charge on the outstanding lease liability. The lease liability 

reduces over the term of the lease by the value of the lease payments, net 

of the implied interest charge, as payments are made. It is for this reason 

that IFRS 16 is dilutive to profit before tax and earnings per share at the 

initial stages of a lease and accretive at the end of the lease. However,

over the term of the lease, the finance charges and depreciation will equal

the rental payments. 



In accordance with IAS 36: Impairment of assets, on recognition and at each 

reporting date, the right-of-use asset is subject to impairment testing and 

any such impairments are classified under items of a capital nature in the 

statement of comprehensive income.



The impact of the IFRS 16 adoption on the Group's 30 June 2019 results is 

summarised as follows:



On the statement of financial position:

-  An IFRS 16 lease liability of R21.5 billion and right-of-use asset 

   of R15.7 billion has been raised; 

-  Retained earnings has been reduced by R4.0 billion inclusive of a 

   R3.3 billion adjustment to opening retained earnings on 2 July 2018; 

-  A deferred income tax asset of R1.0 billion has been raised. This is 

   due to temporary differences between the lease liability and right-of-use

   asset;

-  Trade and other receivables decreased by R0.8 billion due to a

   reclassification of prepaid leases to right-of-use assets; and

-  The fixed escalation operating lease accrual and onerous lease 

   provision of R1.5 billion has been derecognised. 



On the statement of comprehensive income:

-  Group sales and gross profit are unaffected;

-  Depreciation increased by R2.5 billion due to the creation of the 

   right-of-use asset;

-  Operating lease expense declined by R4.2 billion as a result of the

   derecognition of the IAS 17 straight-line rental expense;

-  There was an increase in the net monetary gain on the creation of the

   right-of-use asset. It is important to note that these restated results

   still apply hyperinflation accounting in accordance with IAS 29:

   Financial reporting in hyperinflationary economies;

-  Group trading profit increased by R1.7 billion;

-  Exchange rate losses increased by R0.5 billion mainly due to the Group's

   US dollar leases. From the 2020 financial year, the Group will apply net

   investment hedge accounting to reduce this impact; 

-  Items of a capital nature increased by R0.4 billion as a result of the

   required annual impairment testing on the right-of-use asset created;

-  Finance costs increased by R1.8 billion. This is due to the implied

   interest charge raised on the aforementioned R21.5 billion IFRS 16 lease

   liability; 

-  Group profit before tax declined by R1.0 billion to R5.4 billion; and

-  Previously reported diluted headline earnings per share of 779.9c

   decreased by 81.4c to 698.5c. 



On the statement of cash flows:

-  Lease payments which were previously included in operating activities

   are now allocated between principle and finance costs. The principle

   lease payments are included in financing activities and the finance cost

   remains in operating activities;

-  The Group's net cash flow is not affected; and

-  Dividends paid are not affected. 



The application of IFRS 16 does not impact the Group's underlying business, 

operations, liquidity or cash flow. It also does not affect the Group's 

business strategy on leasing or otherwise. 



The complete restated comparative financial information for the 2019 

financial year included in Annexure A is the responsibility of the directors 

of Shoprite Holdings. It has been prepared for illustrative purposes only 

and has not been reviewed or reported on by the Group's auditors.



The Group is hosting an IFRS 16 briefing webcast call on 18 February 2020. 

It will be hosted by the Group chief financial officer, Anton de Bruyn,

and will follow the format of a short presentation followed by an

opportunity for questions and answers. Registration will be via

http://www.corpcam.com/shoprite18022020. The presentation will be available on

the company website www.shopriteholdings.co.za shortly before the webcast 

begins.



Pieter Engelbrecht       Anton de Bruyn            Natasha Moolman 

Chief executive officer  Chief financial officer   Group investor relations



14 February 2020



Sponsor: Nedbank Corporate and Investment Banking



ANNEXURE A: RESTATEMENT OF FINANCIAL RESULTS 



PRO FORMA STATEMENT OF COMPREHENSIVE INCOME



                                               As 

                                       previously

                                         reported    Impact of     Restated

                                      52 weeks to      IFRS 16  52 weeks to

                                       30 Jun '19   30 Jun '19   30 Jun '19

                                               Rm           Rm           Rm



Sale of merchandise                       150 395            -      150 395 

Cost of sales                            (115 074)           -     (115 074)

GROSS PROFIT                               35 321            -       35 321 

Other operating income                      3 218            -        3 218 

Depreciation and amortisation              (2 640)      (2 513)      (5 153)

Operating leases                           (4 643)       4 189         (454)

Employee benefits                         (11 997)           -      (11 997)

Other operating expenses                  (13 303)           -      (13 303)

Net monetary gain (hyperinflation)            920           27          947 

TRADING PROFIT                              6 876        1 703        8 579 

Exchange rate gains/(losses)                  115         (458)        (343)

Items of a capital nature                     (80)        (416)        (496)

OPERATING PROFIT                            6 911          829        7 740 

Interest received from bank 

account balances                              273            -          273 

Finance costs                                (845)      (1 814)      (2 659)

PROFIT BEFORE INCOME TAX                    6 339         (985)       5 354 

Income tax expense                         (2 068)         194       (1 874)

PROFIT FOR THE PERIOD                       4 271         (791)       3 480 



OTHER COMPREHENSIVE INCOME, NET OF 

INCOME TAX                                 (2 773)         120       (2 653)

Items that will not be reclassified to 

profit or loss

  Re-measurements of post-employment 

  medical benefit obligations                    3            -            3 

Items that may subsequently be reclassified 

to profit or loss

  Foreign currency translation 

  differences including hyperinflation 

  effect                                   (2 776)         120       (2 656)

TOTAL COMPREHENSIVE INCOME FOR 

THE PERIOD                                  1 498         (671)         827 



PROFIT ATTRIBUTABLE TO:                     4 271         (791)       3 480 

  Owners of the parent                      4 260         (792)       3 468 

  Non-controlling interest                     11            1           12 



TOTAL COMPREHENSIVE INCOME 

ATTRIBUTABLE TO:                            1 498         (671)         827 

  Owners of the parent                      1 487         (672)         815 

  Non-controlling interest                     11            1           12 



Basic earnings per share (cents)            768.2       (142.9)       625.3 

Diluted earnings per share (cents)          767.3       (142.6)       624.7 

Basic headline earnings per share (cents)   780.8        (81.6)       699.2 

Diluted headline earnings per share (cents) 779.9        (81.4)       698.5 



PRO FORMA STATEMENT OF FINANCIAL POSITION



                                               As

                                       previously

                                         reported    Impact of     Restated

                                            as at      IFRS 16        as at

                                       30 Jun '19   30 Jun '19   30 Jun '19

                                               Rm           Rm           Rm



ASSETS

NON-CURRENT ASSETS                         30 212       16 028       46 240 

Property, plant and equipment              21 444            -       21 444 

Right-of-use assets                             -       15 741       15 741 

Intangible assets                           3 077            -        3 077 

Government bonds and bills                  2 516            -        2 516 

Loans receivable                            1 664            -        1 664 

Deferred income tax assets                    629        1 000        1 629 

Trade and other receivables                   882         (713)         169 



CURRENT ASSETS                             33 969          (41)      33 928 

Inventories                                20 889            -       20 889 

Trade and other receivables                 4 197          (41)       4 156 

Current income tax assets                     480            -          480 

Government bonds and bills                    500            -          500 

Loans receivable                              196            -          196 

Cash and cash equivalents                   7 707            -        7 707 



ASSETS HELD FOR SALE                          814            -          814 



TOTAL ASSETS                               64 995       15 987       80 982 



EQUITY

CAPITAL AND RESERVES ATTRIBUTABLE 

TO OWNERS OF THE PARENT

Stated capital                              7 516            -        7 516 

Treasury shares                              (605)           -         (605)

Reserves                                   19 152       (3 962)      15 190 

                                           26 063       (3 962)      22 101 

NON-CONTROLLING INTEREST                      114           (8)         106 

TOTAL EQUITY                               26 177       (3 970)      22 207 



LIABILITIES

NON-CURRENT LIABILITIES                    11 204       17 807       29 011 

Lease liabilities                               -       19 158       19 158 

Borrowings                                  9 044            -        9 044 

Deferred income tax liabilities               568          (30)         538 

Provisions                                    289          (18)         271 

Fixed escalation operating lease accruals   1 303       (1 303)           - 



CURRENT LIABILITIES                        27 614        2 150       29 764 

Trade and other payables                   19 495         (170)      19 325 

Contract liabilities                          791            -          791 

Lease liabilities                               -        2 320        2 320 

Borrowings                                  2 662            -        2 662 

Current income tax liabilities                423            -          423 

Provisions                                    119            -          119 

Bank overdrafts                             4 124            -        4 124 



TOTAL LIABILITIES                          38 818       19 957       58 775 



TOTAL EQUITY AND LIABILITIES               64 995       15 987       80 982 



PRO FORMA STATEMENT OF CASH FLOWS



                                               As 

                                       previously

                                         reported    Impact of     Restated

                                      52 weeks to      IFRS 16  52 weeks to

                                       30 Jun '19   30 Jun '19   30 Jun '19

                                               Rm           Rm           Rm



CASH FLOWS FROM OPERATING ACTIVITIES          635        2 269        2 904 

Operating profit                            6 911          829        7 740 

Less: investment income and finance 

income earned                                (764)           -         (764)

Non-cash items                              2 362        3 258        5 620 

Changes in working capital                 (3 520)          (8)      (3 528)

Cash generated from operations              4 989        4 079        9 068 

Interest received                           1 020            -        1 020 

Interest paid                                (874)      (1 810)      (2 684)

Dividends received                             22            -           22 

Dividends paid                             (2 430)           -       (2 430)

Income tax paid                            (2 092)           -       (2 092)



CASH FLOWS UTILISED BY INVESTING 

ACTIVITIES                                 (4 693)         (24)      (4 717)

Investment in property, plant and 

equipment and intangible assets 

to expand operations                       (3 709)           -       (3 709)

Investment in property, plant and 

equipment and intangible assets 

to maintain operations                     (1 571)           -       (1 571)

Prepayments for right-of-use assets             -          (24)         (24)

Proceeds on disposal of property, 

plant and equipment and intangible assets     265            -          265 

Proceeds on disposal of assets held for sale  184            -          184 

Payments for government bonds and bills    (1 017)           -       (1 017)

Proceeds from government bonds and bills    1 444            -        1 444 

Amounts paid to Resilient Africa (Pty) Ltd    (51)           -          (51)

Other loans receivable advanced              (437)           -         (437)

Cash inflows from other loans receivable      204            -          204 

Acquisition of operations                      (5)           -           (5)



CASH FLOWS FROM FINANCING ACTIVITIES        4 397       (2 245)       2 152 

Repayment of lease liability obligations        -       (2 245)      (2 245)

Purchase of treasury shares                  (115)           -         (115)

Proceeds from treasury shares disposed         13            -           13 

Repayment of borrowings                    (4 271)           -       (4 271)

Borrowings raised                           8 770            -        8 770 



NET MOVEMENT IN CASH AND CASH EQUIVALENTS     339            -          339 

Cash and cash equivalents at the 

beginning of the period                     3 470            -        3 470 

Effect of exchange rate movements 

and hyperinflation on cash and 

cash equivalents                             (226)           -         (226)

CASH AND CASH EQUIVALENTS AT THE END 

OF THE PERIOD                               3 583            -        3 583 



Consisting of:

Cash and cash equivalents                   7 707            -        7 707 

Bank overdrafts                            (4 124)           -       (4 124)

                                            3 583            -        3 583


Date: 14-02-2020 01:38:00
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