annual report 2009

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NOTES TO THE FINANCIAL STATEMENTS
for the years ended 31 March




21.

FINANCIAL RISK MANAGEMENT
21.1 Overview
  The group has exposure to the following risks from its use of financial instruments:
  • credit risk;
  • cash flow and liquidity risk; and
  • market risk.
  This note presents information about the group’s exposure to each of the above risks and the group’s objectives, policies and processes for measuring and managing risk. Further quantitative disclosures are included throughout these consolidated financial statements.
   
  The board of directors has overall responsibility for the establishment and oversight of the group’s risk management framework. The board has established the risk committee, which is responsible for developing and monitoring the group’s risk management policies. The committee reports quarterly to the board of directors on its activities.
   
  The group’s risk management policies are established to identify and analyse the risks faced by the group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the group’s activities. The group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.
   
  The group audit committee oversees how management monitors compliance with the group’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the group. The group audit committee is assisted in its oversight role by internal audit. Internal audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the audit committee.
   
21.2 Credit risk
  Credit risk is the risk of financial loss to the group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises on trade receivables – retail, cash, investments, participation in export partnerships, staff housing loans, loan receivables and private label card receivables.
   
  Trade receivables – retail
  The group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. There is no concentration of credit risk.
   
  The risk arising on trade receivables – retail is managed through a stringent group policy on the granting, continual review and monitoring of credit sales. The group has established a credit policy under which each new customer is analysed individually for creditworthiness before payment terms and conditions are offered. A credit facility is established for each customer, which represents the maximum open amount without requiring approval from the risk management committee; these limits are reviewed annually.
   
  The group does not require collateral in respect of trade and other receivables.
   
  The group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The allowance is calculated using the internationally-recognised Markov model. The Markov model uses delinquency roll rates on customer balances to determine the inherent bad debt in a debtors’ book.
   
  The board of directors believe that the application of the Markov model results in trade receivables balances being measured fairly.
   
  Cash and investments
  The group limits its exposure to credit risk through dealing with well-established financial institutions with high credit standing, and thus management does not expect any counterparty to fail to meet its obligations. The group does not consider there to be any significant concentration of credit risk in respect of which adequate impairment has not been raised.
   
  Participation in export partnerships
  A company listed on the JSE Limited has warranted certain important cash flow aspects of the subsidiary companies’ participation in export partnerships. The group does not consider there to be any significant concentration of credit risk in respect of which adequate impairment has not been raised.
   
  Staff housing loans, loan receivables and private label card receivables
  The group limits its exposure to credit risk through a stringent group policy on the granting, continual review and monitoring of loan advances. The group does not consider there to be any significant concentration of credit risk in respect of which adequate impairment has not been raised.
   
21.3 Cash flow and liquidity risk
  Liquidity risk is the risk that the group will not be able to meet its financial obligations as they fall due. The group’s approach to managing liquidity is to ensure that it will always have sufficient cash flow to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the group’s reputation.
   
  This risk is managed through cash flow forecasts, the optimisation of daily cash management and by ensuring that adequate borrowing facilities are maintained. In terms of the articles of association, the group’s borrowing powers are unlimited.
   
21.4 Market risk
  Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect the group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, whilst optimising the return.
   
  The group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. In accordance with its treasury policy, the group does not hold or issue derivative financial instruments for trading purposes.
   
  Currency risk
  The group is exposed to currency risk as operating subsidiaries undertake transactions that are denominated in foreign currencies. These currencies are the euro, US Dollars (USD) and Sterling (GBP).
   
  At any point in time it is the group’s intention to hedge all its estimated foreign currency exposure in respect of forecast purchases over the following six months. The group uses forward exchange contracts to hedge its currency risk, most with a maturity of less than one year from the reporting date. When necessary, forward exchange contracts are rolled over at maturity.
   
  Refer to note 22.3 for further details.
   
  Interest rate risk
  The group is exposed to interest rate risk as it both borrows and invests funds. This risk is managed by maintaining an appropriate mix of fixed and floating rate instruments with reputable financial institutions.
   
  In addition, interest rate swap contracts are entered into for the purposes of cash flow hedging. The RCS loan receivables largely bear interest at fixed rates whilst borrowings bear interest at variable rates.
   
21.5 Capital management
  The group primarily makes use of equity for capital management purposes.
   
  The board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence, and to sustain future development of business. The board of directors monitors the return on equity, which the group defines as profit for the year divided by total average equity, including minority interests. The board of directors also monitors the level of dividends to ordinary shareholders.
   
  The board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. The group’s medium-term target is to achieve a return on equity of 35%, in 2009 the return was 26,9% (2008: 29,6%).
   
  From time to time the group purchases its own shares on the market. The shares are primarily intended to be used to meet the group’s obligations in terms of its share option schemes (refer note 33).
   
  There were no changes in the group’s approach to capital management during the year.
   
  Neither the company nor any of its subsidiaries are subject to externally imposed capital requirements except for the subsidiaries of RCS Investment Holdings (Proprietary) Limited who in terms of the shareholders’ agreement with SBSA cannot lend in excess of 70% of their combined trade receivables value. This requirement has been met for the year under review.
   

22.

FINANCIAL INSTRUMENTS
22.1 Credit risk
  Exposure
  The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. The maximum exposure to credit risk at the reporting date was:
   
    Carrying amount
    2009 2008
    Rm Rm
  Loans and receivables    
    Preference share investment 200,0 200,0
    Staff housing loans 1,2 1,3
    Private label card receivables 1 484,4 1 068,3
    Loan receivables 988,2 716,2
    Participation in export partnerships 94,7 100,5
    Trade receivables – retail 2 746,3 2 445,6
    Other receivables and prepayments 135,2 131,0
    Cash 296,2 169,5
  Interest rate swaps used for hedging    
    Assets – 1,8
  Forward exchange contracts used for hedging    
    Assets 7,9 10,3
    5 954,1 4 844,5
  The group believes that there is no significant concentration of credit risk.    
       
  Impairment losses: Trade receivables – retail    
  The group manages the ageing of its trade receivables – retail book on both a contractual and recency basis, but uses the recency basis to calculate writeoff and impairment losses. Recency refers to the number of payment cycles that have elapsed since the last qualifying payment was received.    
       
  Recency categories range from 0 to 5, at which point the account will be written off, unless the payment profile score is above a fixed level.    
       
  The ageing of past due unimpaired trade receivables – retail at 31 March was:    
  Recency 1 412,8 379,3
  Recency 2 133,8 121,9
  Recency 3 66,5 52,6
  Recency 4 22,7 18,0
  Recency 5 7,4 5,1
    643,2 576,9
  The movement in the allowance for impairment in respect of trade receivables – retail    
  during the year was as follows:    
  Balance at 1 April 220,7 194,8
  Impairment raised 293,3 243,1
  Impairment loss recognised (261,5) (217,2)
  Balance at 31 March 252,5 220,7
       
  During the year the group renegotiated the terms of customers to the value of R43,1 (2008: R131,0) million. No impairment in respect of these customers was recognised (2008: Rnil).    
       
  Impairment losses: Loan receivables    
  The group manages the ageing of its loan receivables on a contractual basis.    
  The ageing of past due unimpaired loan receivables at 31 March was:    
  Past due 0 – 30 days 57,6 40,6
  Past due 31 – 60 days 17,5 12,7
  Past due 61 – 90 days 10,3 7,0
  Past due more than 91 days 14,7 19,2
      100,1 79,5
  The movement in the allowance for impairment in respect of loan receivables during the    
  year was as follows:    
  Balance at 1 April 54,5 82,3
  Impairment raised 86,7 56,5
  Impairment loss recognised (96,4) (84,3)
  Balance at 31 March 44,8 54,5
  No loan receivables have been renegotiated during the year (2008: Rnil).    
         
  Impairment losses: Private label card receivables    
  The group manages the ageing of its private label card receivables on a contractual basis.    
  The ageing of past due unimpaired private label card receivables at 31 March was:    
  Past due 0 – 30 days 228,4 206,7
  Past due 31 – 60 days 85,3 94,5
  Past due 61 – 90 days 42,2 53,2
  Past due more than 91 days 61,4 73,9
      417,3 428,3
  The movement in the allowance for impairment in respect of private label card    
  receivables during the year was as follows:    
  Balance at 1 April 106,9 73,7
  Impairment raised 182,9 202,6
  Impairment loss recognised (220,7) (169,4)
  Balance at 31 March 69,1 106,9
  Included in the carrying amount of private label card receivables is R17,3 (2008: R73,5) million relating to receivables whose terms have been renegotiated, which would otherwise have been past due.
   
  Customers that are not past due and have a good track record with the group make up 78,6% of the trade receivables – retail book (2008: 74,9%), 84,9% of loan receivables (2008: 84,5%) and 66,1% of the private label card receivables (2008: 57,6%).
   
22.2 Cash flow and liquidity risk
  The following are the contractual maturities of financial liabilities, including interest payments:
 
    Carrying
amount		 Cash flows Less than
1 year		 1 – 5 years More than
5 years
  31 March 2009          
  Non-derivative financial liabilities          
  Interest-bearing debt 1 339,9 1 590,3 522,3 1 068,0 –
  Minority interest loans 783,2 1 074,5 97,1 – 977,4
  Trade and other payables 1 252,5 1 252,5 1 252,5 – –
  Derivative financial liabilities          
  Interest rate swaps used for hedging 24,6 16,2 9,7 6,5 –
    3 400,2 3 933,5 1 881,6 1 074,5 977,4
  31 March 2008          
  Non-derivative financial liabilities          
  Interest-bearing debt 1 373,2 1 384,7 1 212,5 172,2 –
  Minority interest loans 495,2 682,4 62,4 620,0 –
  Trade and other payables 741,8 741,8 741,8 – –
    2 610,2 2 808,9 2 016,7 792,2 –
             
  The following table indicates the periods in which the cash flows associated with derivatives that are cash flow hedges are expected to occur and impact profit or loss:
  31 March 2009          
  Interest rate swaps          
  Assets – – – – –
  Forward exchange contracts          
  Assets 7,9 (334,4) (334,4) – –
    7,9 (334,4) (334,4) – –
  31 March 2008          
  Interest rate swaps          
  Assets 1,8 2,0 1,9 0,1 –
  Forward exchange contracts          
  Assets 10,3 (134,9) (134,9) – –
    12,1 (132,9) (133,0) 0,1 –
             
22.3 Currency risk          
  Exposure to currency risk
  Exposure to currency risk is hedged through the use of forward exchange contracts. At 31 March the group had forward exchange contracts in various currencies in respect of future commitments, which do not relate to specific balance sheet items. These amounted to:
             
             
             
             
             
          Foreign
currency
000’s		 Rand
equivalent
(at forward
cover rate)
R’000
  31 March 2009          
  USD       32 597 328 613
  euro       346 4 563
  GBP       82 1 209
            334 385
  31 March 2008          
  USD       17 528 131 467
  euro       214 2 350
  GBP       73 1 068
            134 885
  The following significant exchange rates applied during the year:        
      Average rate 31 March spot rate
      2009 2008 2009 2008
  USD   8,89 7,15 9,33 8,14
  euro   12,50 10,14 12,30 12,43
  GBP   15,01 14,34 13,29 16,04
             
  Sensitivity analysis          
  The group is primarily exposed to the US Dollar, euro and British Pound currencies. The following analysis indicates the group’s sensitivity at year-end to the indicated movements in these currencies on financial instruments, assuming that all other variables, in particular interest rates, remain constant. The rates of sensitivity are the rates used when reporting the currency risk to the board and represents management’s assessment of the potential change in foreign currency exchange rates at the reporting date.
             
  A 10% strengthening of the Rand against the following currencies at 31 March would have increased (decreased) equity and profit or loss by the amounts shown below.
   
          Equity Profit or loss
          Rm Rm
  31 March 2009          
  USD       27,0 –
  euro       0,4 –
  GBP       0,1 –
  31 March 2008          
  USD       11,4 –
  euro 0,2 –
  GBP 0,1 –
  A 10% weakening of the Rand against the above currencies at 31 March would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.
       
22.4 Interest rate risk    
  Profile    
  At 31 March the interest rate profile of the group’s interest-bearing financial instruments was:    
       
      Interest rate at 31 March Carrying amount
      2009 2008 2009 2008
      % % Rm Rm
  Fixed rate instruments          
  Loan receivables   35,0 36,0 988,2 716,2
  Interest-bearing debt   13,3 12,3 (900,0) (100,0)
          88,2 616,2
             
  Variable rate instruments          
  Staff housing loans   11,4 13,4 1,2 1,3
  Private label card receivables   30,0 36,6 1 484,4 1 068,3
  Trade receivables – retail   0,0 0,0 616,5 727,2
  Trade receivables – retail   27,0 25,0 2 129,8 1 718,4
  Cash   13,0 15,0 296,2 169,5
  Financial assets       4 528,1 3 684,7
  Interest-bearing debt   11,0 11,6 (439,9) (1 273,2)
  Minority interest loans   12,4 12,6 (783,2) (495,2)
  Financial liabilities       (1 223,1) (1 768,4)
             
  Fair value sensitivity analysis for fixed rate instruments
  The group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss, and the group does not designate derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. Therefore a change in interest rates at 31 March would not affect profit or loss.
   
  Interest rate sensitivity analysis for variable rate instruments
  An increase of 100 basis points in interest rates at 31 March would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis was performed on the same basis for 2008.
   
          Profit or loss Equity
          Rm Rm
  31 March 2009          
  Variable rate instruments       81,8 –
  Interest rate swaps       4,0 3,9
  Cash flow sensitivity (net)       85,8 3,9
  31 March 2008          
  Variable rate instruments       89,9 –
  Interest rate swaps       3,3 1,5
  Cash flow sensitivity (net)       93,2 1,5
  A decrease of 100 basis points in interest rates at 31 March would have had the equal but opposite effect on equity and profit or loss, on the basis that all other variables remain constant.
   
22.5 Fair values
  Fair values versus carrying amounts
  The fair values of financial assets and liabilities reasonably approximate their carrying values in the balance sheet.
   

23.

POST-BALANCE SHEET EVENTS
  No significant events took place between the end of the financial year under review and the date of signature of these financial statements.
   
      2009 2008
      Rm Rm

24.

COMMITMENTS AND CONTINGENT LIABILITIES

    
  Authorised capital commitments 6,8 –
  Contingent liabilities    
  There are no known contingent liabilities requiring disclosure.    
  Forward exchange commitments    
  Refer to note 22.3    
         

25.

REVENUE

    
  Retail turnover 8 089,6 7 668,7
  Interest received (refer note 26) 1 300,7 1 056,4
  Dividends received – retail 19,1 17,2
  Other revenue (refer note 27) 579,5 511,3
      9 988,9 9 253,6
         

26.

INTEREST RECEIVED

    
  Trade receivables – retail 526,1 385,5
  Loan receivables 307,6 314,7
  Private label card receivables 449,2 347,9
  Sundry – RCS Group 8,2 1,1
  Sundry – retail 9,6 7,2
      1 300,7 1 056,4
         

27.

OTHER REVENUE

    
  Merchants’ commission – RCS Group 36,7 39,7
  Club income – retail 169,6 175,6
  Club income – RCS Group 6,0 5,5
  Customer charges income – retail 18,9 16,5
  Customer charges income – RCS Group 136,2 99,1
  Insurance income – retail 99,5 80,0
  Insurance income – RCS Group 75,3 66,0
  Cellular income – one2one airtime product 29,8 22,6
  Sundry income – retail 7,5 6,3
      579,5 511,3
       

28.

OPERATING PROFIT BEFORE FINANCE CHARGES

    
  Operating profit before finance charges has been arrived at after taking account of:    
       
  Trading expenses    
    Depreciation: land and buildings (6,1) (6,1)
    Depreciation: shopfitting, vehicles, computers and furniture and fittings (223,8) (196,7)
    Amortisation (1,2) (1,9)
    Employee costs: normal (1 180,3) (1 053,9)
    Employee costs: bonuses and restraint payments (16,0) (35,4)
    Employee costs: share-based payments (25,7) (30,7)
    Store occupancy costs: normal (676,2) (575,8)
    Store occupancy costs: operating lease liability adjustment 0,4 (7,7)
    Net bad debt and provision movement – retail (261,5) (217,2)
    Net bad debt and provision movement – RCS Group (317,1) (253,7)
    Other operating costs (561,5) (489,8)
    (3 269,0) (2 868,9)
  The following disclosable amounts are included above:    
  Auditor’s remuneration    
    Audit fees 3,6 2,9
    Fees for other services 0,1 0,1
  Loss (profit) on sale of property, plant and equipment 3,1 (0,8)
  Retirement fund expenses 93,3 91,0
  Staff discount 11,0 11,5
  Net foreign exchange (profit) loss (2,4) 5,8
       

29.

INTEREST PAID

    
  Interest expense on financial liabilities measured at amortised cost 249,8 120,1
       

30.

INCOME TAX EXPENSE

    
  South African current taxation    
    Current year 469,3 507,0
    Prior year under (over) provision 2,8 (22,1)
    Secondary tax on companies 58,8 71,1
  South African deferred taxation    
    Current year 18,6 (1,3)
    Rate change – 0,8
    Prior year (over) under provision (2,2) 16,1
  Non-South African current taxation    
    Current year 15,8 9,3
  Non-South African deferred taxation    
    Current year 1,4 (0,7)
    Prior year over provision (0,1) –
    564,4 580,2
       
    % %
  Reconciliation of tax rate    
  Effective tax rate 31,8 32,5
  Exempt income 0,3 1,2
  Non-deductible expenditure (0,6) (0,8)
  Non-South African tax rate (0,1) (0,1)
  Prior year under provision – 0,4
  Rate change – (0,1)
  Secondary tax on companies and withholding tax on dividends (3,4) (4,1)
  South African statutory rate 28,0 29,0

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