Shoprite - Impact of SAICA Circular on Operating Leases
Shoprite Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 1936/007721/06)
ISIN no: ZAE000012084
JSE share code: SHP
(`Shoprite`)
IMPACT OF THE SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS (SAICA) CIRCULAR
ON OPERATING LEASES
SAICA has recently issued a circular, number 7/2005 explaining the requirements
of IAS17 (AC105) - Leases in respect of operating leases which include fixed
rental increases. In the process of adopting International Financial Reporting
Standards (`IFRS`) it has become apparent that in South Africa lease expenditure
and income with fixed rental increases have generally been applied on a basis
inconsistent with that of international practice. IAS 17(AC105) states that
lease payments/income should be recognised as an expense/income 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.
Many South African lessees and lessors have recognised rental expenses and
income, based on the cash flows as set out in the lease agreement. This was done
on the basis that it was considered that the increased cash flows arose as a
result of the increased benefits arising from the leased asset. It is now
considered that the definition of `user`s benefit` is only affected by factors
which impact the physical usage of the property. The adoption of the straight-
line method results in a similar impact on the income statement in each
reporting period irrespective of the fact that cash flows differ. In the case
of a lessee with aggregate leases tending towards the beginning of the lease
terms, this would result in a charge to the income statement higher than the
cash flows, giving rise to a lease accrual. Aggregate leases tending towards
the end of the lease terms would result in a lower charge to the income
statement with a concomitant release of the accrual.
Shoprite have assessed the impact of the change in interpretation of the
statement and the adoption of the straight-line method and advise that there
will be no material impact on earnings per share and headline earnings per share
of the financial results to be released for the year ended June 2005. For the
comparative year ended June 2004, headline earnings per share will be restated
by 1.1 cents, from 79.9 cps to 81 cps. The impact of the lease accrual on
opening retained income at 1 July 2004 is a negative R385m.
As the change in interpretation has no cash impact, it will have no effect on
the cash distribution declaration. The full accounting impact of the change will
be provided in the financial results issued on the 24 August 2005.
Johannesburg
17 August 2005
Sponsor to Shoprite
Nedbank Capital
Date: 17/08/2005 08:51:15 AM
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