| Fri 5 Aug 2005, 10:07 | | Massmart Holdings Limited - Impact of the South Af |
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Massmart Holdings Limited - Impact of the South African Institute of Chartered
Accountants (`SAICA`) Circular on Operating Leases
Massmart Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration Number: 1940/014066/06)
(Share code: MSM)
(ISIN: ZAE000029534)
(`Massmart` or `the Company`)
Impact of the South African Institute of Chartered Accountants (`SAICA`)
Circular on Operating Leases
Introduction
Massmart shareholders` attention is drawn to the above circular (7/2005), issued
by the South African Institute of Chartered Accountants on 2 August 2005,
entitled `Operating Leases`.
The Issue
In this circular, SAICA refers to Paragraphs 33 of IAS 17(AC105) and 9 of SIC 15
(AC415), which state respectively:
`Lease payments under an operating lease shall be recognised as an expense on a
straight line basis over the lease term unless another systematic basis is more
representative of the time pattern of the user`s benefit.`
`The underlying substance of operating leases is that the lessor and lessee
exchange the use of an asset for a specified period for the consideration of a
net amount of money. The accounting periods in which this net amount is
recognised by either the lessor or lessee is not affected by the form of
agreement or the timing of payments.`
To date, Massmart has recognised rental expenses on the basis of the cash flows
in the operating lease agreements, believing that the correlation between
increasing trading densities and escalating rentals represented `another
systematic basis` which was `more representative of the time pattern of the
user`s benefit`, than the straight-line basis referred to above. Our auditors,
Deloitte & Touche, concurred with this treatment of operating leases.
Paragraphs 9 and 11 of the Circular conclude:
`After considerable debate, both locally and internationally, about when it is
appropriate not to use the straight line basis, it has become clear that `other
systematic basis` as applied by South African entities is not consistent with
the requirements of IAS 17 (AC105) as applied internationally. IAS 17 (AC105)
permits a treatment other than straight-line recognition only when another basis
is more representative of the time pattern of the users benefit. This is
expected to be rare. The time pattern of the users benefit is only affected by
factors which impact the physical usage of the property. Straight-line
recognition means that the payments over the lease term are to be aggregated and
divided by the lease term in months to arrive at the monthly expense. The
cumulative difference between the amounts recognised in the income statement and
the cash flows is recognised on the balance sheet.`
`Lessees and lessors should recognise the change to the straight line method
retrospectively from the inception of the lease in terms of IAS 8 (AC103) -
Accounting Policies, Changes in Accounting Estimates and Errors`
Massmart`s Response
The Massmart Board has resolved that with immediate effect, all Massmart
operating lease charges in respect of rentals escalated at fixed rates will now
be expensed on a straight-line basis over the period of the lease, disregarding
the time-value of money or the economic substance of the lease, which is as
required by this clarification.
Impact on Earnings
Massmart has calculated the required adjustment to headline earnings and
headline earnings per share arising from this clarification. These adjustments,
which have been audited, are shown below for the June 2005 and 2004 financial
years. The results for the year to June 2004 will be restated in the
publication of the results for the year to June 2005 and a R369m reduction to
the 2004 opening retained income will be processed.
June June
2005 2004
Impact on headline earnings R(54)m R(51)m
Impact on headline earnings
per share (27) cents (26) cents
It is clear that the application of the straight-line basis will have a more
material adverse impact on companies with a newer average lease profile than on
those with an older average lease profile. Over time, as the average lease
profile ages, the quantum of the reduction to headline earnings compared to cash
earnings, will reduce and become positive.
Impact on Cash & Gearing
These accounting adjustments have no impact on Massmart`s cash flows or cash
position. The adjustment to opening retained income of R369m plus the headline
earnings adjustments will however have the effect of reducing shareholders`
equity, thereby increasing Massmart`s gearing ratios and returns on equity.
Impact on Dividends
The Massmart Board will propose that the dividend for the year ending June 2005
be calculated on a two-times dividend cover before the adjustment referred to
above. In the 2006 financial year the two-times dividend cover will be
calculated on headline earnings after this adjustment, in line with the current
dividend policy.
Preliminary Results to June 2005
Massmart`s reviewed results for the year to June 2005, including the above
accounting adjustments, will be released on 25 August 2005.
Johannesburg
?5U August 2005
Sponsor to Massmart:
Deutsche Securities (SA) (Pty) Ltd
Date: 05/08/2005 10:00:08 AM
Produced by the JSE SENS Department
