43. Accounting estimates and judgements

The board of directors has considered the Group’s critical accounting policies, key sources of uncertainty and areas where critical accounting judgements were required in applying the Group’s accounting policies.

1. Critical accounting policies

The Group audit committee is satisfied that the critical accounting policies are appropriate to the Group.

2. Key sources of estimation uncertainty

Post-retirement obligations

The Trustees have agreed to allocate any future surplus (deficit) arising from experience of the Defined Benefit in-service member pool to the employer surplus account. We have not made any allowance for the allocation as at 30 June 2020. The amount to be allocated can only be determined at a statutory valuation date and must be allocated to the employer surplus account by the Trustees. The amount allocated will come through as a gain or loss in the next valuation period, this is consistent with the methodology applied at the previous valuation date.

Property, plant and equipment, and rental fleet

The residual values of these assets are reviewed annually after considering future market conditions, the remaining life of the asset and projected disposal values. The estimation of the useful lives is based on historic performance as well as expectation about future use and, therefore, requires a degree of judgement to be applied. The depreciation rates represent management’s current best estimate of the useful lives of the assets. Certain properties are accounted for as own use assets and are thus held at cost less depreciation. Market indicators reflect that these properties could realise more than their carrying values if disposed of, in which case depreciation is halted.

Goodwill and indefinite life intangible assets

The Group has assessed the carrying value of goodwill and indefinite life intangible assets to determine whether any of the amounts have been impaired. The carrying values were assessed using price earnings methods and the actual results and forecasts for future years (refer note 17 Intangible assets and note 18 Goodwill for further disclosure).

Investments

The Group reflects its investments at amortised cost, fair value through profit or loss and fair value through other comprehensive income. The directors’ value of unlisted investments, was determined using a combination of discounted cash flow, net asset value and price earnings methods. MIAL, an unlisted investment held for trading, is recorded at fair value less cost to sell and is based on a signed sale agreement, which is subject to private shareholders not exercising their pre-emptive rights, and written approvals from the Airports Authority of India, the Indian Government and the lenders. MIAL is classified as fair value through profit or loss and has been disclosed as a current asset as it is expected to be sold within the next twelve months. Certain investments are of a long term nature and uncertainty surrounds their valuation, which may result in a significant change in value over time (refer note 21 Investments).

Inventory

Impairment allowances are raised against inventory when it is considered that the amount realisable from such inventory’s sale is considered to be less than its carrying amount. The impairment allowances are made with reference to an inventory age analysis.

Trade receivables and banking advances

The Group applies the simplified approach to determine the ECLs for trade receivables, contract assets and lease receivables (collectively, accounts receivable). ECLs for accounts receivable are calculated using a provision matrix. For banking advances the measurement of ECLs is performed using a three stage model, based on changes in credit quality since initial recognition.

3. Critical accounting judgements in applying the Group’s accounting policies

Judgements made in the application of IFRS that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

Deferred taxation

Deferred taxation assets are recognised to the extent it is probable that the taxable income will be available against which they can be utilised. Future taxable profits are estimated based on business plans which include estimates and assumptions regarding economic growth, interest, inflation and taxation rates and competitive forces.

Control assessment

In determining whether a substantial holding in an entity should be treated as an associate or subsidiary, management reviews the size of its holding, the voting rights it holds, the spread of shareholders and whether it has any arrangement to act in concert with any other investors.

Provisions

Refer to note 37 Provisions for further disclosure.

Post-retirement obligations

The Group provides retirement benefits for its permanent employees through pension funds with defined benefit and defined contribution categories. Actuarial valuations are based on assumptions which include the discount rate, inflation rate, salary increase rate, expected return on plan assets and the pension increase allowance rate.

Puttable non-controlling interest liabilities

The Group has entered into put arrangements where non-controlling interests are entitled to sell certain of their holdings in subsidiaries to the Group at future contracted dates. The puttable non-controlling interest liability is calculated as the present value of the expected redemption value, discounted from the expected redemption date to the reporting date. There are two main assumptions used in the calculation of the liability; the expected redemption value at the expected redemption date and the discount rate used to discount the expected redemption value to the reporting date.

The discount rate is derived from an applicable government bond yield curve, in the country in which the subsidiary operates, and is applied over the number of years between the reporting date and the redemption date, plus an appropriate credit spread.

COVID-19 pandemic

Judgement was required to consider the impact of COVID-19 on the results of the Group for the current year. The Group’s assessment of the impact is detailed below.

  2020
R'000 		 
Restructuring costs 460 443
Net impairment losses on financial assets (IFRS 9: ECL) 228 315  
Write down of inventory to net realisable value 54 738  
Onerous contracts 57 148  
Bidvest COVID-19 Fund 400 000  
Impairment of MIAL, classified as a financial asset at fair value through profit or loss, where the fair value is not based on observable market data (Level 3) 351 442  
COVID-19 non-capital charges 1 552 086  
COVID-19 capital impairments 1 147 958  

 

COVID-19 consideration   Assessment  
Going concern   Limited impact on going concern for the foreseeable future. Based on the projections of future results and cash flows, future debt repayment commitments and covenants currently in place, and assessment of the Group’s borrowing facilities available, no going concern risk has been identified (refer note 31 Borrowings, Note 40.3.3 Undrawn facilities).
Impairment of goodwill   The goodwill in the Automotive and Corporate segments has been impaired in the amount of R496 million as a result of lower forecasted cash flows impacted by COVID-19, the expected slowdown in economic activity as well as higher discount rates (refer note 18 Goodwill).  
Restructuring and retrenchment costs   The Group has provided for restructuring and retrenchment costs that occurred as a result of COVID-19 and the business impact. The operating segments that were most materially impacted were Automotive, Branded Products and Services. The demand for products and services in the Automotive and Branded Products segment is expected to be subdued and as a result operations have been downscaled. With regards to the Services segment, the costs recognised relate primarily to the travel and aviation related services, which have been negatively impacted. The total charge recognised amounted to R460 million.  
Net impairment losses on financial assets (IFRS 9: ECL)   Due to the increase in credit risk and decline in the future economic outlook, IFRS 9 impairments of R228 million were recognised. The Financial Services and Services segments were the most severely impacted as a result of the shutdown in the travel and aviation industries, due to industry wide macro economic declines, forward looking default rates increased.  
Impairment of the investment in MIAL   The investment in MIAL has been impaired in the amount of R351 million as a consequence of the uncertainty created by COVID-19 and its impact on the travel and aviation industry. Accordingly the investment has been impaired to its recoverable amount which declined since outbreak of the COVID-19 pandemic (refer note 21 Investments).  
Deferred tax asset recoverability   No material impact noted, deferred tax assets raised based on sufficient taxable profits expected in the future.  
Inventories   While subdued demand in some segments is expected, the impact is not material and the provision for obsolete inventories was increased by R55 million to account for the subdued trading environment.  
Impairment of intangible assets   Impairment of intangible assets of R322 million was recorded due to the slow down in demand for certain products and services. The operating segments that were most materially impacted were Branded Products and Commercial Products (refer note 17 Intangible assets).  
Bidvest COVID-19 fund   The Group has pledged to provide support to its employees and wider society to assist in dealing with the impact of COVID-19. R400 million has been set aside for this purpose most of which has already been spent on the projects identified.  
Property, plant and equipment   Property, plant and equipment was impaired by R222 million which occurred predominantly in the Services segment as a result of the impact on the aviation industry and related services (refer note 16 Property, plant and equipment).  
Investment in associates and joint ventures   On 4 May 2020, as a direct consequence of COVID-19, Comair commenced with voluntary business rescue proceeding in terms of Section 129 of the Companies Act and simultaneously successfully applied for the suspension of trading in the company’s shares on the JSE with immediate effect. As a result the Group ceased equity accounting for this 27.2% held investment and impaired its value to nil. The Group recognised a net capital impairment of R241 million and its share of Comair operating losses of R201 million for the year.