Notes to the condensed financial statements

for the six months ended 30 September 2019

1 GENERAL ACCOUNTING POLICIES

This is the first set of group financial statements where IFRS 16 – Leases has been applied. Changes to significant accounting policies are described in Note 1.2.

1.1  Basis of preparation

In preparing these interim financial statements, management has made judgements and estimates that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. The significant judgements made by management in applying the group’s accounting policies and the key sources of estimation uncertainty were the same as those described in the last annual financial statements, except for new significant judgements and key sources of estimation uncertainty related to the application of IFRS 16, which is described below.

Estimates

The revaluation of investment property requires judgement in the determination of future cash flows from leases and an appropriate reversionary capitalisation rate. Note 2.3 sets out further details of the fair measurement of investment property.

Judgements

Judgement is applied in certain areas based on historical experience and reasonable expectations relating to future events. Key areas of judgement are noted below:

Business combination versus asset acquisition

Management assessed properties acquired and has concluded that in its view, except for Castellana Properties SOCIMI SA (acquired in a prior period), all acquisitions are property acquisitions in terms of IAS 40 – Investment Property and are therefore accounted for in terms of that standard. Apart from Castellana, in the opinion of management, these properties did not constitute a business as defined in terms of IFRS 3 – Business Combinations, as there were no adequate processes identified within these properties to warrant classification as businesses.

Non-current assets held for sale

Management applied judgement in assessing whether investment property and subsidiaries that are actively being marketed qualify to be classified as held for sale. In management’s opinion, MICC Namibia and the non-core commercial and industrial portfolio in southern Africa met the IFRS 5 requirements and are classified as held for sale.

1.2  Change in accounting policy

The only material impact of IFRS 16 – Leases relates to instances where Vukile leases land from a third party.

On adoption of IFRS 16, the group recognised lease liabilities in relation to land leases which had previously been classified as “operating leases” under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 April 2019. The incremental borrowing rate applied to the lease liabilities on 1 April 2019 ranged from 10.35% to 15.50%, depending on the lease term. Subsequently, each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

On transition date, the corresponding right-of-use assets were measured at the amount equal to the lease liability. The right-of-use asset relating to land leases are subsequently remeasured at fair value in terms of IAS 40.

The group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the group relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.

2 FAIR VALUE MEASUREMENT

2.1  Fair value measurement of financial instruments

Financial assets and financial liabilities measured at fair value in the statement of financial position are grouped into three levels of a fair value hierarchy. The three levels are defined based on the observability of significant inputs to the measurement, as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3:unobservable inputs for the asset or liability.

2.2  Fair value hierarchy

The following table presents financial assets and liabilities measured at fair value in the statement of financial position in accordance with the fair value hierarchy. The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value.

    30 September 2019    
Group Level 1 
Rm 
Level 2 
Rm 
Level 3 
Rm 
Total 
Rm 
 
Assets          
Investments in associates at fair value  1 067  —  —  1 067    
Executive share scheme financial assets  97  —  —  97    
Unlisted investment at fair value  —  —    
Derivative financial instruments  —  91  18  109    
Total  1 164  91  26  1 281    
Liabilities               
Executive share scheme financial liabilities  —  (35) —  (35)   
Derivative financial instruments  —  (434) (164) (598)   
Total  —  (469) (164) (633)   
Net fair value  1 164  (378) (138) 648    
    31 March 2019   30 September 2018    
Group Level 1 
Rm 
Level 2 
Rm 
Level 3 
Rm 
Total 
Rm 
Level 1 
Rm 
Level 2 
Rm 
Total 
Rm 
 
Assets                
Investments in associates at fair value  1 297  —  —  1 297  1 393  —  1 393    
Executive share scheme financial assets    72   —    —    72    73    —    73    
Derivative financial instruments    —   53    —    53    —    10    10    
Total  1 369  53  —  1 422  1 466  10  1 476    
Liabilities                         
Executive share scheme financial liabilities    —   (45)   —    (45)   —    (33)   (33)   
Derivative financial instruments    —   (316)   (224)   (540)   —    393    393    
Total  —  (361) (224) (585) —  360  360    
Net fair value  1 369  (308) (224) 837  1 466  370  1 836    

There have been no significant transfers between levels 1, 2 and 3 in the reporting period under review.

Investments in associates at fair value

This comprises shares held in listed property companies at fair value, which are determined by reference to quoted closing prices at the reporting date.

Executive share scheme financial assets and liabilities

This comprises equity-settled share-based long-term incentive reimbursement rights net of the settlement liability, stated at fair value.

Unlisted investment at fair value

As part of Edcon's restructure, Vukile agreed to subscribe for equity in Edcon. Management's best estimate of the fair value of the investment is the cost thereof. While management is not aware of any immediate information indicating that the investment is impaired, the fair value will continue to be monitored and reassessed as more information becomes available to make a more detailed assessment of the fair value. Currently, nothing has come to our attention which indicates a material negative deviation from Edcon's stated business plan.

Derivative financial instruments

Level 2 derivatives consist of interest rate swap contracts, CCIRS and forward exchange contracts. The fair values of these derivative instruments are determined by Absa Capital, Rand Merchant Bank, Standard Bank, Nedbank, Investec Bank Limited, Banco Popular, Banco Santander and Caixabank using a valuation technique that maximises the use of observable market inputs. Level 3 derivatives consist of net settled derivatives and share warrants that have been valued using the Black Scholes option pricing model.

Measurement of fair value

The methods and valuation techniques used for the purpose of measuring fair value are unchanged compared to the previous reporting period.

2.3 Fair value measurement of non-financial assets (investment property)

The fair values of commercial buildings are estimated using an income approach which capitalises the estimated rental income stream, net of projected operating costs, using a discount rate derived from market yields. The estimated rental stream takes into account current occupancy levels, estimates of future vacancy levels, the terms of in-place leases and expectations of rentals from future leases over the remaining economic life of the buildings.

The most significant inputs are the discount rate and the reversionary capitalisation rate. The inputs used in the valuations were:

  30 September 2019   31 March 2019  
  Discount rate   Reversionary
capitalisation rate
  Discount rate   Reversionary
capitalisation rate
 
  Range
%
Weighted
average
%
  Range
%
Weighted
average
%
  Range
%
Weighted
average
%
  Range
%
Weighted
average
%
 
Southern Africa 12.4 to 17.7   13.4   7.4 to 13.3   8.6   12.4 to 17.4   13.5   7.4 to 13.0   8.7  
Spain 7.0 to 9.0 7.9   5.0 to 9.3 6.1   7.0 to 9.0 7.9   5.0 to 9.2 6.0  

The estimated fair value would increase/(decrease) if the expected market rental growth was higher/(lower), expected expense growth was lower/(higher), the vacant periods were shorter/(longer), the occupancy rate was higher/(lower), the rent-free periods were shorter/(longer), the discount rate was lower/(higher) and/or the reversionary capitalisation rate was lower/(higher).

The effect of a 25 basis point (bps) change to the base discount rate will have the following impact on the 30 September 2019 value of the portfolio:

    25bps increase   25bps decrease    
  Fair value
Rm
Decreased
fair value
Rm
Decrease
Rm
%
decrease
Increased
fair value
Rm
Increase
Rm
%
increase
 
Southern Africa(1) 15 813 15 354 (459) (2.9) 16 302 489 3.1  
Group Fair value
€m
Decreased
fair value
€m
Decrease
€m
%
decrease
Increased
fair value
€m
Increase
€m
Rm
%
increase
 
Spain 1 028 1 009 (19) (1.9) 1 048 20 1.9  
(1) Fair value excludes non-controlling interest in Clidet No 1011 (Pty) Ltd, which owns 80% of Moruleng Mall.

The following table reflects the levels within the hierarchy of non-financial assets measured at fair value:

  30 September
2019
Recurring
fair value
measurements
Level 3
Rm
  30 September
2018
Recurring
fair value
measurements
Level 3
Rm
31 March
2019
Recurring
fair value
measurements
Level 3
Rm
 
Investment property 31 112   27 373 29 518  
Investment property under development   163  
  30 September
2019
Non-recurring
fair value
measurements
Level 3
Rm
  30 September
2018
Non-recurring
fair value
measurements
Level 3
Rm
31 March
2019
Non-recurring
fair value
measurements
Level 3
Rm
 
Investment property held for sale 1 801   2 057 1 002  

There were no transfers in or out of level 3 in the reporting period under review.