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Notes to the summarised consolidated financial statements

for the year ended 30 June 2014

1. BASIS OF PREPARATION

The summarised consolidated financial statements have been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS) and its Interpretations adopted by the International Accounting Standards Board (IASB) in issue and effective for the Group at 30 June 2014 and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council. The results are presented in accordance with IAS 34 – Interim Financial Reporting and comply with the Listings Requirements of the Johannesburg Stock Exchange Limited and the Companies Act of South Africa, 2008. These summarised consolidated financial statements do not include all the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements as at and for the year ended 30 June 2013.

These summarised consolidated financial statements have been prepared under the supervision of R Mumford, CA (SA) and were approved by the board of directors on 26 August 2014.

2. ACCOUNTING POLICIES

The accounting policies adopted and methods of computation used in the preparation of the summarised consolidated financial statements are in accordance with IFRS and are consistent with those of the annual financial statements for the year ended 30 June 2013 except where the Group has adopted new or revised accounting standards as per note 3 below.

3. CHANGES IN ACCOUNTING POLICIES

The Group has adopted all the new, revised or amended accounting pronouncements as issued by the IASB which became effective to the Group on 1 July 2013, including some of the more significant changes as listed below:

IFRS 10 Consolidated Financial Statements

The objective of IFRS 10 is to provide the framework on when an entity is controlled and must be consolidated.

IFRS 11 Joint Arrangements

Where joint arrangements exists the investor is required to assess whether the joint arrangement is a joint operation or a joint venture based on the legal structure of the investee and the investor’s right to and obligations for the underlying assets and liabilities of the investee. IFRS 11 requires equity accounting for joint ventures and eliminates the proportionate consolidation option of accounting.

IFRS 12 Disclosure of interest in other entities

IFRS 12 is a disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates and unconsolidated entities. In general, the disclosure requirements in IFRS 12 are more extensive.

IFRS 13 Fair Value Measurement

IFRS 13 improves consistency and reduce complexity by providing a single definition of fair value and a source of fair value measurement and disclosure requirements for use across all accounting standards.

IAS 19 Employee benefits

The amendments to IAS 19 require all actuarial gains and losses to be recognised immediately in other comprehensive income so that the pension asset or liability reflects the full value of the plan deficit or surplus.

The new, revised or amended standards were adopted in accordance with their transitional provisions with the adoption of IAS 19 resulting in the only restatement of the comparative amounts as follows:

  Audited  
    Movements during 2013 Cumulative
effect on
June 2013
 
  Effect on
1 July 2012
Remeasure-
ment
Currency
adjustment
Through profit
or loss
 
Financial position            
Assets            
Increase in deferred tax assets 19 58 4 (1) 80  
Total assets 19 58 4 (1) 80  
Capital and reserves            
Decrease in other reserves     (9)   (9)  
Decrease in retained earnings (40) (125)   2 (163)  
Attributable to owners of Imperial (40) (125) (9) 2 (172)  
Decrease in non-controlling interest (2) (3)     (5)  
Decrease in total equity (42) (128) (9) 2 (177)  
Liabilities            
Increase in retirement benefit obligations 61 186 13 (3) 257  
Total liabilities – increase 61 186 13 (3) 257  
Total equity and liabilities – increase 19 58 4 (1) 80  
Profit or loss            
Decrease in net operating expenses         3  
Increase in income tax expense         (1)  
Increase in net profit for the year         2  
Earnings per share, headline earnings per share and core earnings per share            
Increase in basic (cents)         1  
Increase in diluted (cents)         1  
Comprehensive income            
Increase in net profit for the year         2  
Other comprehensive income         (137)  
Items that may be reclassified subsequently to profit or loss         (9)  
– Decrease in exchange gains arising on translation of foreign entities         (9)  
Items that will not be reclassified to profit or loss         (128)  
– Decrease in retained income from remeasurement of retirement benefit obligations         (186)  
– Increase in deferred tax assets relating to remeasurement of retirement
benefit obligations
        58  
Decrease in total comprehensive income for the year         (135)  
Decrease in total comprehensive income attributable to:            
Owners of Imperial         (132)  
Non-controlling interest         (3)  
          (135)  

Circular 3/2013 – Headline earnings

The group also adopted Circular 3/2013 – Headline Earnings as issued by the South African Institute of Chartered Accountants (SAICA). The adoption of the new Circular had no impact on the way the group calculates its headline earnings per share.


    Audited
2014
Rm
    Audited
2013
Rm
 
4. FOREIGN EXCHANGE RATES          
  The following major rates of exchange was used in the translation of the Group’s foreign operations:          
  SA Rand : Euro          
  –  closing 14,51     13,04  
  –  average 14,07     11,43  
  SA Rand : US Dollar          
  –  closing 10,62     10,01  
  –  average 10,38     8,84  
5. GOODWILL AND INTANGIBLE ASSETS          
  Goodwill          
  Cost 5 596     4 747  
  Accumulated impairments (859)     (821)  
    4 737     3 926  
  Net book value at beginning of year 3 926     3 238  
  Acquisition of subsidiaries and businesses 579     331  
  Impairment charge (38)     (139)  
  Currency adjustment 270     496  
  Net book value at end of year 4 737     3 926  
  Intangible assets 2 029     1 280  
  Goodwill and intangible assets 6 766     5 206  
6. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values of financial assets and liabilities carried at amortised cost

The following table sets out instances where the carrying amount of financial assets and financial liabilities, as recognised on the statement of financial position, differ from their fair values.

2014 Audited
Carrying value
Rm
  Audited
Fair value*
Rm
 
Listed corporate bonds (included in interest-bearing borrowings) 5 837   5 830  
Listed non-redeemable, non-participating preference shares 441   377  
* Level 1 of the fair value hierarchy.

The fair values of the remainder of the Group’s financial assets and financial liabilities approximate their carrying values.

Fair value hierarchy

The Group’s financial instruments carried at fair value are classified in three categories defined as follows:

Level 1 financial instruments are those that are valued using unadjusted quoted prices in active markets for identical financial instruments.
Level 2 financial instruments are those valued using techniques based primarily on observable market data. Instruments in this category are valued using quoted prices for similar instruments or identical instruments in markets which are not considered to be active; or valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based on observable market data.
Level 3 financial instruments are those valued using techniques that incorporate information other than observable market data. Instruments in this category have been valued using a valuation technique where at least one input, which could have a significant effect on the instrument’s valuation, is not based on observable market data.

The following table presents the valuation categories used in determining the fair values of financial instruments carried at fair value:

  Audited  
2014 Total
Rm
    Level 1
Rm
  Level 2
Rm
  Level 3
Rm
 
Financial assets carried at fair value                  
Fair valued through profit or loss                  
Investments held for trading (Included in Investments and loans)* 1 983     1 674   309      
Fair valued through other comprehensive income                  
Available-for-sale investments (Included in Investments and loans) 209     209          
Foreign exchange contracts (Included in Trade and other receivables) 5         5      
Financial liabilities carried at fair value                  
Fair valued through profit or loss                  
Put option liability (Included in Other financial liabilities) 990             990  
Contingent considerations (Included in Other financial liabilities) 92         10   82  
Swap instruments (Included in Other financial liabilities) 199         199      
Foreign exchange contracts (Included in Trade and other payables) 47         47      
* The fair value gains on investments held for trading amounted to R188 million, of which R151 million was realised. The fair value gains on investment is included in ‘Net operating expenses’ in profit or loss.

Investments classified as level 1 valued by quoted market prices in active markets consisted of listed equity securities. Instruments classified as level 2 use valuation techniques by observable inputs which are mainly comprised of short-term deposits and over the counter (OTC) derivatives instruments.

Transfers between hierarchy levels

The Group recognises transfers between levels of the fair value hierarchy as at the end of the reporting period during which the change has occurred. There were no transfers between Level 1 and Level 2 fair value measurements. A short-term fixed deposit which was previously classified as level 3 has been reclassified to level 2 which is considered a more appropriate classification.

Movements in level 3 financial instruments measured at fair value

The following tables shows a reconciliation of the opening and closing balances of level 3 financial instruments carried at fair value.

Financial assets Audited
Unlisted
investments
Rm
 
Balance at beginning of year 129  
Disposals (51)  
Currency adjustments 10  
Transfers to level 2 (88)  
Carrying value at the end of the year – 2014    

Financial liabilities Audited
Put option
liability
Rm
  Audited
Contingent
consideration
Rm
    Audited
Total
Rm
 
Balance at beginning of year     214     214  
Initial recognition direct in equity 1 289         1 289  
Reversed in equity on buy-out on non-controlling interest (289)         (289)  
Fair valued through profit or loss 16   (18)     (2)  
Settlements     (39)     (39)  
Currency adjustments (26)   13     (13)  
Transfers to level 2     (88)     (88)  
Carrying value at the end of the year – 2014 990   82     1 072  

Level 3 sensitivity information

The fair values of the level 3 financial liabilities of R1 072 million were estimated by applying an income approach valuation method including a present value discount technique. The fair value measurement is based on significant inputs that are not observable in the market. The key assumption used in the valuations was the assumed probability of achieving profits targets. The assumed profitability were based on historical performances but adjusted for expected growth.

The following table shows how the fair value of the level 3 financial liabilities as at 30 June 2014 would change if the key assumption were to be replaced by a reasonable possible alternative.

  Financial instruments Valuation technique Main assumption Carrying
value
Rm
  Decrease in
liability
Rm
 
  Put option liability Income aproach Earnings growth 990   (117)  
  Contingent consideration liabilities Income aproach Assumed profits 82   (2)  

    Audited
2014
Rm
    Audited
2013
Rm
 
7. VEHICLES FOR HIRE by reporting segment          
  Vehicle Import, Distribution and Dealerships 679     595  
  Vehicle Retail, Rental and After Market Parts 1 613     1 725  
  Motor-related Financial Services and Products 460     305  
  Head Office and Eliminations (449)     (160)  
    2 303     2 465  
8. CASH AND CASH EQUIVALENTS          
  Cash resources 3 103     1 844  
  Cash resources included in assets classified as held for sale       4  
  Short-term loans and overdrafts (Included in interest-bearing borrowings) (2 205)     (2 328)  
    898     (480)  
9. CONTINGENCIES AND COMMITMENTS          
  Capital commitments 2 285     935  
  Contingent liabilities 317     294  
10. DISPOSALS AND ACQUISTIONS DURING THE YEAR

The Group successfully completed its disposal of the Tourism division to Cullinan Holdings Limited (Cullinan) during the year. The purchase price was settled by the issue of 81 818 181 ordinary shares in Cullinan representing a 10% shareholding.

For acquisitions during the year refer to business combinations on page 26.

11. EVENTS AFTER THE REPORTING PERIOD

Business acquisition

The Group acquired 62,5% interest in Pharmed Pharmaceuticals (Proprietary) Limited, a pharmaceutical wholesaler, forR148 million in July 2014.

Dividend declaration

Shareholders are advised that a preference and an ordinary dividend has been declared by the board of Imperial on 26 August 2014. For more details please refer to the dividend declaration on page 11.

12. OPERATING SEGMENTS

Imperial is active in three major areas of mobility: – Consumer and industrial Logistics, vehicle importing, distribution, dealerships, retail, rental and aftermarket parts and vehicle-related financial services. The group is managed through five operating segments – Logistics Africa; Logistics International; Vehicle Import, Distribution and Retail; Vehicle Retail, Rental and After Market Parts; Insurance and Motor-related Financial Services and Products. These segments are the basis on which the executive committee allocates resources, measures performance and exercises control and governance.

Arising from the imperative to eliminate complexity and to reflect the new management structure the Other Segment, which previously comprised Car Rental and After Market Parts, has been combined with the Automotive Retail division. The combined segment is now referred to as Vehicle Retail, Rental and After Market Parts. Prior year’s comparatives have been restated accordingly.

The principal services and products provided by each of the segments are:

LOGISTICS

Logistics Africa

This segment comprises logistics businesses within South Africa and the Rest of Africa. In South Africa this entails logistics services across the entire supply chain to clients that span almost every industry. In the Rest of Africa, this has evolved beyond conventional supply chain management to include route-to-market solutions.

Logistics International

This segment comprises the European logistics businesses, which provide complete logistics solutions, including contract logistics, warehousing, inland waterway shipping, contract manufacturing in the chemical industry and related value-added services across European markets. The division is a leading logistics partner to the automobile, steel, aluminium, paper and chemical industries. During the year, inland waterway shipping commenced in South America.

VEHICLES

Vehicle Import, Distribution, Retail and Dealerships

This segment imports and distributes a range of passenger and commercial vehicles, industrial equipment and motorcycles. Vehicles are retailed through vehicle dealerships in South Africa and Australia. In the Rest of Africa, the division is targeting the distribution of vehicles with a focus on right-hand drive markets which can be accessed from its South African base. The South African dealerships are distribution channels for the Group’s financial services, insurance, vehicle servicing and parts businesses.

Vehicle Retail, Rental and After Market Parts

This segment’s extensive network of franchised vehicle dealerships is the largest in South Africa. Dealerships are also distribution channels for the Group’s financial services, insurance, vehicle servicing and parts businesses. In the commercial sector, this segment owns and operates standalone commercial dealerships in South Africa and the United Kingdom. It also manufactures and sells caravans, canopies and accessories, rents vehicles in Southern Africa, operates the largest used car dealer network in South Africa, as well as panelshops that repair vehicles in the rental fleet, the consumer market and insurance companies. The aftermarket parts business is involved in the wholesaling and distribution of motor vehicle parts and accessories.

FINANCIAL SERVICES

Insurance

This segment is a provider of motor-related, value-added insurance products for both passenger and commercial vehicles. Motor-related products are distributed through dealer and vehicle finance channels. Approximately one third of its business originates through Imperial dealerships, with the balance through independent dealerships, OEM partnerships and call centres. The division also supplies life insurance products in the emerging market which are distributed through independent brokers and increasingly through affinity schemes.

Motor-related Financial Services and Products

This segment comprises the creation and sale of service, maintenance and extended warranty products associated with the automotive market, and profit shares from alliances on the sale of financial services and commission factoring operations. Other businesses accounted for in this segment are: MiX Telematics, an associate company specialising in vehicle fleet telematics and stolen vehicle recovery systems; Ariva, which provides long-term vehicle rental solutions and Imperial Fleet Management (IFM), an alliance with WesBank, which provides full maintenance leasing (FML) and other fleet management solutions to corporate, parastatal and SMME clients.