| Wed 24 Aug 2005, 11:25 | | Imperial - The implementation of IFRS |
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Imperial - The implementation of IFRS
Imperial Holdings Limited
Registration no: 1946/021048/06
Share code: IPL
ISIN code: ZAE000067211
The implementation of International Financial Reporting
Standards (IFRS)
The group has completed its initial assessment of the
estimated impact of IFRS and the directors feel it is
appropriate to update shareholders in this regard.
Imperial Holdings has up to 25 June 2005 prepared
consolidated financial statements in accordance with South
African Statements of Generally Accepted Accounting
Practice.
For accounting periods beginning on or after 1 January 2005,
companies are required to prepare consolidated financial
statements in accordance with International Financial
Reporting Standards.
The Group`s first Report and Accounts prepared under IFRS
accounting policies will be for the year ending 25 June 2006
and the first interim results will be for the 6 months
ending 25 December 2005.
DETAILED BELOW IS A SUMMARY OF THE MATERIAL CHANGES ARISING
FROM THE ADOPTION OF IFRS AND THEIR ESTIMATED RETROSPECTIVE
IMPACT ON THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 25
JUNE 2005. THE SUMMARY IS ONLY AN INDICATION OR A BEST
ESTIMATE AT THIS STAGE AND HAS NOT BEEN AUDITED.
The financial information presented below has been prepared
on the basis of those International Financial Reporting
Standards, International Accounting Standards, and
International Financial Reporting Interpretations Committee
(IFRIC) and Standard Interpretations Committee (SIC)
interpretations that are expected to be applicable for the
June 2006 year end. They are subject to ongoing review and
endorsement by the South African Institute of Chartered
Accountants and the Accounting Practices Board, whilst the
applicability of the standards continues to be subject to
interpretation by IFRIC as well as emerging industry
consensus. As a consequence further adjustments to the
accounting policies and treatments may need to be made in
the first set of completed IFRS financial statements for the
year ending June 2006.
1. MATERIAL CHANGES
1.1 Leasing Assets
The group`s aviation division, including Safair Lease
Finance (SLF) and ACL Aviation (ACL), has long-term leases
of up to ten years duration with strong counter parties. In
terms of South African GAAP, and prior to the adoption of
IFRS, the appropriate depreciation charge for aircraft on
such leases was determined with reference to future values
at the end of the lease term expressed in Rand, which were
based on estimated future US Dollar residual values and
estimated future exchange rates, which were determined at
the time of entering into the lease. To the extent that
such depreciation charges could subsequently prove to have
been insufficient to depreciate the aircraft to their
correct residual values at the end of the lease term, the
carrying value of each aircraft was subjected to an
impairment test from time to time, to determine a value in
use, whereby such carrying value was written down to the
higher of net realisable value or the aggregate of the net
present value of (i) future cash flows from the long-term
leases and (ii) the Rand based residual value at the end of
the lease term, which was established in Dollars and
translated using a forward exchange rate derived from a
market related forward exchange curve.
With the adoption of IFRS an entity is now required annually
to measure the residual value of an item of property, plant
and equipment as the amount it estimates it would receive
currently for the asset if it were already in an age and
condition that it would be at the end of its useful life.
For Dollar assets this means translating at every year end
the Dollar residual value at the exchange rate prevailing.
Furthermore an entity is required to determine the
depreciation charge separately for each significant
component of property, plant and equipment.
To adopt the component approach we will have to establish
over 1 000 components for the aviation leasing fleet at June
2004. To fully restate the aviation leasing fleet, for each
component we would have to determine residual values by year
going back in time to the date they were acquired. This
would span a long period with large fluctuations in exchange
rates leading to large variances. The reconstruction cost of
the historic component residual values and the resultant
depreciation is very onerous and costly and of limited
benefit.
IFRS recognises that there can be practical difficulties in
determining the historic financial effects of restating
assets. As a result of this IFRS allows for fair values to
be established at the date of first time adoption and to use
these fair values as deemed cost. Where aircraft values can
be reliably established from recognised sources, the group
has elected to use this approach for the aircraft. These
values can be established for all our aircraft with
exception of our Hercules fleet which comprise a small part
of the value of our fleet. Here we have to use our best
endeavours to establish the historic information to rework
the fleet values, but any uncertainties would be of minor
consequence.
The fair value adjustments are established in Dollar values
from the recognized sources and are translated into Rand at
the applicable rate at 25 June 2004, being R 6.32 to the
Dollar. Into the future this exercise will have to be done
for each component and depending on exchange rate movements
will either increase or reduce the depreciation charge.
Because of the long term nature of the aircraft the residual
values finally realised at the end of the useful life could
be very different mainly due to the uncertainties in the
exchange rates.
In accordance with IFRS, using fair value as deemed cost
arrived at by applying the exchange rate of R6.32 to the
Dollar value of the aircraft at 25 June 2004 results in the
estimated gross write down in our aviation fleet as follows:
Rm
Safair 730
SLF - our after tax share as an associate 420
ACL - our after tax share as an associate 30
The difference between IFRS and SA GAAP is that SA GAAP
recognizes the net present value of future cash flows from
the long-term lease rentals and the residual value at the
end of the lease term as converted from Dollars to Rand at a
forward exchange rate and in terms of IFRS it is the current
market value that is used.
We estimate that based on prevailing exchange rates the
annual depreciation charge to the end of the lease term in
SLF would be higher in terms of IFRS than in terms of SA
GAAP, but the need for future impairments would be far less,
if any, and in Safair, the annual depreciation charge would
be lower in terms of IFRS. The difference between SLF and
Safair relate to the relative age of the aircraft. Safair`s
depreciation charge in the restated June 2005 financial year
reduces by approximately R60 million, while increases by R
40 million in SLF (full amount before tax) and in ACL it is
not significant.
Saficon Industrial Equipment`s forklift fleet will reduce by
approximately R100 million to exclude certain overhead costs
which were capitalized under current SA GAAP but must be
expensed under IFRS. This will have the impact of reducing
depreciation by approximately R40 million but increasing
operating costs in the restated June 2005 financial year by
a similar amount.
1.2 Transport Fleet
Our transport fleet has to be restated for the annual
revision of residual values. This resulted in an increase in
the carrying value of the fleet of approximately R170
million at June 2004.
It is estimated that the depreciation charge will reduce by
R10 million in the restated June 2005 financial year.
1.3 Share Based Settlement Transactions
1.3.1 Ukhamba BEE Transaction
In March 2004 Imperial issued deferred ordinary shares to
Ukhamba Holdings (Pty) Ltd for the ultimate benefit of staff
and as a result these deferred ordinary shares are seen as
issued for services rendered and have to be accounted for in
accordance with IFRS 2. As this transaction took place in
March 2004 it will have no impact on the income statement
for the June 2005 financial year. Shareholders` equity in
the opening balance sheet at 26 June 2004 will have a debit
to distributable reserves and a credit to a new line in
equity representing the share issue of approximately R1 300
million. Therefore the net result to equity is nil.
1.3.2 Lereko Mobility BEE Transaction
The transaction in terms of which Lereko Mobility (Pty) Ltd
acquired equity ownership of approximately 7.25% of the
issued ordinary share capital of Imperial (the Lereko
transaction) resulted in an equity instrument being issued.
This is an equity settled share based payment transaction
and has to be accounted for in accordance with IFRS 2
resulting in a once off cost of approximately R100 million
in the restated June 2005 financial year. This cost reduces
distributable reserves through the income statement and will
be credited to a separate line item in equity representing
the share issue resulting ultimately in a nil adjustment to
equity.
1.4 Imperial Bank
The IFRS impact on Imperial Bank, Imperial`s associate
company, is mainly due to the deferral of revenue which will
now be taken over the period of the financing contracts,
instead of up front under current principles of SA GAAP.
This results in Imperial`s investments in associates being
reduced by approximately R30 million with the corresponding
debit to equity. In addition Imperial`s share of
attributable profits in the restated June 2005 financial
year reduces by approximately R 10 million.
1.5 Summary of Estimated Material Changes
The above changes after adjusting for tax and the change in
the tax rate has the following impact on the June 2005
results:
SA GAAP IFRS Variance %
Change
Revenue (Rm) 42 546 42 546
Operating profit (Rm) 3 523 3 493 -30 -0.9
Operating margin (%) 8.3 8.2 - 0.1 -1.2
Profit before tax (Rm) 3 528 3 468 -60 -1.7
Attributable profit (Rm) 2 340 2 260 -80 -3.4
Headline Earnings Per
Share 1 046 1 006 -40 -3.8
(cents)
Headline Earnings Per Share 1 046 1 056 10 1.0
(cents)*
Net assets (Rm) 9 454 8 534 -920 -9.7
Share capital & reserves (Rm) 8 991 8 071 -920 -10.2
Net Gearing (%) 69 76 7 10.1
* Excluding the impact of the Lereko transaction which has a
once off effect of reducing earnings.
The above restatements will have no cash flow effect.
2. OTHER IFRS ADJUSTMENTS
In addition to the significant adjustments above there will
be a number of smaller adjustments which in total should not
have a material impact. An indication of these adjustments
is:
2.1 Revenue
The group receives revenue on the sale of life assurance
policies. Under SA GAAP the full amount was included in
revenue. Under IFRS, where policies have both insurance and
deposit components (investment policies), the deposit or
investment component is not recognized as revenue. Revenue
arising from services fees earned on the investment
component will be recognized over the period of the
contract. Although this impacts the revenue line there would
be little impact on profits as there is a corresponding
reduction in costs.
2.2 Attributable Profits
2.2.1 Share options
All share options issued since 7 November 2002 and not
exercised by June 2004 need to be expensed over the vesting
period. The valuations show that the total IFRS reduction to
retained income at June 2004 amounts to approximately R 2
million with a corresponding increase in equity for the
share based settlement equity raised. This will also require
an expense to the income statement of approximately R 1
million for the restated June 2005 financial year.
2.2.2 Deferral of Acquisition Costs in Regent Life
IFRS4 requires an adjustment to be calculated for the
deferral of acquisition costs on existing business written.
This will have a relatively small impact.
2.2.3 Other Items of Property, Plant and Equipment
There may be a small impact resulting from residual value
changes on the other classes of Property, Plant and
Equipment.
2.2.4 Embedded Foreign Currency Derivatives
There may be a small impact from the different treatment of
embedded foreign currency derivatives.
3 Estimate of Total Impact
Should the impact of material and other changes vary by R50
million positive or negative it will have the following
impact:
Positive R50 million SA GAAP IFRS Variance %
Change
Attributable profit (Rm) 2 340 2 310 -30
-1.3
Headline Earnings Per Share 1 046 1 031 -15
-1.4
(cents)
Headline Earnings Per Share 1 046 1 081 35
3.3
(cents)*
Net assets (Rm) 9 454 8 584 -870
-9.2
Negative R50 million SA GAAP IFRS Variance %
Change
Attributable profit (Rm) 2 340 2 210 -130 -5.6
Headline Earnings Per Share 046 981 -65 -6.2
(cents)
Headline Earnings Per Share 1 046 1 031 -15 -1.4
(cents)*
Net assets (Rm) 9 454 8 484 -970 -10.3
* Excluding the impact of the Lereko transaction which has a
once off effect of reducing earnings.
Bedfordview
24 August 2005
Sponsor:
Merrill Lynch South Africa (Pty) Ltd
