Notes to the summarised consolidated financial statements

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 2020 and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and financial reporting 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 (JSE) 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 annual financial statements as at and for the year ended 30 June 2020.

These summarised consolidated financial statements have been prepared under the supervision of WS Buckton, CA(SA) and were approved by the board of directors on 25 August 2020.

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 applied to the annual financial statements for the year ended 30 June 2019, with the exception of the adoption IFRS 16 and IFRIC 23 as detailed below.

IFRS 16 – Leases

IFRS 16 – Leases, applicable to the group in 2020, introduces a single-lease accounting model that requires the group as a lessee to recognise assets and liabilities for all leases with a term longer than 12 months.

The group’s previous accounting policy was to expense operating lease payments on a straight-line basis over the lease term. From 1 July 2019 the group recognised right-of-use assets and lease obligations, which represents the group’s right to use the underlying leased assets and its obligations to make lease payments, on the statement of financial position. The right-of-use assets are amortised and interest on the lease liabilities are expensed, both in profit or loss. The operating lease payments previously expensed in profit or loss and classified as an operating cash flow are now accounted for as settlements of the lease obligations on the statement of financial position and interest expense in the statement of profit or loss.

In terms of lessor accounting IFRS 16 substantially carries forward the requirements in IAS 17 and accordingly the group continues to account for its leases as operating leases or finance leases. As a result no restatement of previously reported numbers are required.

IFRIC 23 – Uncertainty over Income Tax Treatments

This interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 – Income Taxes when there is uncertainty over income tax treatments. It requires an entity to recognise and measure tax assets and tax liabilities taking those uncertainties into consideration.

The group applied IFRS 16 and IFRIC 23 by adjusting the opening balances at 1 July 2018. The impact of the adoption on the financial statements is summarised below. The 2019 profit or loss was also re-presented for the classification of the European shipping business as a discontinued operation.

The numbers reported for Motus at 30 June 2018 and for the year ended 30 June 2019 were not restated as the deconsolidation of Motus occurred prior to the adoption of IFRS 16.

The impact on profit attributable to non-controlling interests was insignificant.

Headline Earnings Circular 1/2019

The group early adopted Headline Earnings Circular 1/2019 in the current year. The circular was updated to include gains or losses on lease terminations in headline earnings. The impact on 2019 was an increase in continuing headline earnings of R5 million and an increase headline earnings per share by 2 cents.

The following major rates of exchange were used in the translation of the group’s foreign operations:

The group has externally imposed capital requirements in terms of debt covenants on bank facilities. The covenant, which is calculated on a basis pre-IFRS 16 – Leases, requires the group to maintain a net debt:EBITDA* ratio of below 3,25:1.

At 30 June 2020 the group’s net debt was R8 391 million and the net debt:EBITDA ratio was 2,78 times. The increase in the ratio compared to the prior year was driven by lower EBITDA mainly due the Covid-19 pandemic, exacerbated by a sharp devaluation of the Rand which resulted in higher translated foreign net debt.

To protect the covenant against currency volatility, the group has agreed with its debt funders to neutralise the impact of extreme currency volatility on the net debt:EBITDA ratio. Refer to the glossary of terms.

On 31 July 2020 the group disposed of its European shipping business for an enterprise value of R3 440 million. The disposal resulted in a decrease in net debt of R3 440 million, leading to a significant improvement in the net debt:EBITDA covenant ratio post-year-end.

With a focus on capital retention during the current period of uncertainty, the dividend and share repurchases will be reassessed at the interim results in February 2021 based on trading and market conditions in the next six months. Capital expenditure in the near term will be limited to essential and committed expenditure. Significant focus will be placed on cash generation in the short term together with strict working capital measurements.

At 30 June 2020 the group held cash resources of R3 374 million and had committed undrawn credit facilities of R10 620 million. Net working capital was R544 million which benefitted R862 million from an asset backed commerical paper (ABCP) arrangement.

The following table summarises the maturity profile of the group’s financial liabilities based on undiscounted contractual cash flows:

* Refer to glossary of terms.

Trade receivables

The group’s trade accounts receivable consist of a large, widespread customer base with no concentration of credit risk.

For trade receivables the group has applied the simplified approach to measure the loss allowance at lifetime expected credit losses. The group determines the expected losses on these assets by using a provision matrix, estimated based on historical credit loss experience based on past due status of the financial assets, adjusted as appropriate to reflect the current condition and estimates of future economic conditions.

At 30 June 2020, the group has assessed the expected credit losses for trade receivables and due to the financial uncertainty arising from Covid-19 management has increased the expected loss rates for trade receivables based on their judgement as to the impact of Covid-19 on trade receivables. However, due to strict cash management measures under these uncertain times the group was able to significantly reduce trade receivables as well as improve the ageing profile of trade receivables.

In addition certain individual customers were identified as credit impaired which resulted in a specific credit risk allowance of R24 million. The total credit loss charge on trade receivables amounted to R32 million for the year.

Cash resources

The group deposits cash with reputable financial institutions with investment grade credit ratings assigned by international or recognised credit rating agencies or counterparties authorised by the investment committee. None of the financial institutions displayed significant increase in credit risk during the reporting period.

Annual impairment reviews of goodwill and indeterminate life intangible assets are usually performed in March 2020. However, in light of the Covid-19 pandemic the group had decided to perform its annual impairment test close to year-end.

Value-in-use calculations were performed for each cash-generating unit using cash flow projections based on the annual financial budget approved by the board of directors of Imperial on 28 May 2020. Key assumptions used in the impairment test were adjusted for information available at 30 June 2020. The Covid-19 outbreak resulted in increase discount rates, lower cash flow projections and a decrease in terminal growth rates. As a result, goodwill allocated to Surgipharm, which showed marginal headroom in 2019, as well as goodwill allocated to two recent acquisitions were impaired. The total goodwill impairment charge for the year was R223 million.

Movement in goodwill during the year were as follows:

Fair value hierarchy

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

Fair value of financial assets and financial liabilities carried at amortised cost

The carrying value of the group’s financial assets and financial liabilities arrived at amortised costs approximate their fair values.

The following table presents the valuation categories used in determining the fair values of financial instruments carried at fair value at 30 June 2020.

Transfers between fair value hierarchy levels

The group recognises transfers between levels of the fair value hierarchy as at the end of the reporting year during which the change has occurred. There were no transfers between the fair value hierarchies during the year.

Movement in level 3 financial instruments measured at fair value

The following table shows a reconciliation of the opening and closing carrying values of level 3 financial instruments carried at fair value at 30 June 2020.

The Eco Health put option liability was reduced by R244 million based on a change in the key assumptions used being lower earnings outlook and higher discount rates.

The R33 million gain relates to the derecognition of the remaining liability after full and early settlement of the Imres put option liability.

The remeasurement of contingent liabilities of R23 million relates to the reversal of a contingent consideration liability for which achieving profit targets is highly improbable.

Level 3 sensitivity information

The fair values of the level 3 financial instruments were estimated by applying an income approach valuation method including a present value discount technique . The fair value measurements are based on significant inputs that are not observable in the market. Key assumptions used in the valuations includes the assumed probability of achieving profit targets, expected future cash flows and the discount rates applied. The assumed profitabilities were based on historical performances but adjusted for expected growth.

For business acquisitions during the year.

The group’s European shipping business, presented as a discontinued operation at 30 June 2020 was disposed of on 31 July 2020. The proceeds on disposal of R3 440 million resulted in a decrease in net debt of the same value.