1. Accounting policies
General information
KAP International Holdings Limited is a company incorporated in the Republic of South Africa under the Companies Act, 1973. The address of the registered office is given on the inside back cover. The nature of the group's operations and its principal activities are set out in the operating and financial review on pages 11 to 29. These financial statements are presented in South African Rand because that is the currency of the primary economic
environment in which the group operates.
Significant accounting policies
1.1 Basis of accounting
The financial statements have been prepared in accordance with and comply with South African Statements of Generally Accepted Accounting Practice ("GAAP"). The financial statements have been prepared on the historical cost basis, except for the
revaluation of agricultural assets and certain financial instruments. The principal accounting policies adopted are set out below. These policies are consistent in all material respects with those applied in the previous year except for the following changes in accounting policies:
1.1.1 Business combinations
During the year, the group adopted IFRS 3 relating to the treatment of business combinations.
This change has no effect on opening distributable reserves as the group has elected not to re-state its past business combinations. There is no effect on the current year as all acquisitions during the year were acquired under the new accounting policy.
1.1.2 Joint ventures
During the year, the group changed its accounting policy with regard to the treatment of joint ventures. Joint ventures are now accounted for in the group financial statements using the equity method of accounting. In applying the equity method, account is taken of the group's share of accumulated retained earnings and movements in reserves from the effective dates on which the companies become joint ventures and up to the effective dates of disposal. The share of joint ventures' equity reserves is
generally determined from their latest audited financial statements but in some instances unaudited results are used. Provision is made where, in the opinion of the directors, there has been a permanent diminution in the carrying value of an investment in a joint venture.
This change has no effect on opening distributable reserves, as the group had no material reserves in joint ventures at
31 December 2003. There is no effect on the current year as all joint ventures at 31 December 2004 were acquired during the year under the new accounting policy.
1.2 Basis of consolidation
The group annual financial statements comprise those of the parent company, its subsidiaries, associates and jointly
controlled entities, presented as a single economic entity.
1.2.1 Subsidiaries
Subsidiaries are those companies in which the group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to exercise control over the
operations. Control is achieved where the company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair
values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired is credited to
profit and loss in the period of acquisition. The interest of minority shareholders is stated at the minority's proportion of the fair values of the assets and liabilities recognised.
Subsequently, any losses applicable to the minority interest in excess of the minority interest are allocated against the interests of the parent.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of
disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.
The company carries its investments in subsidiaries at cost less accumulated impairment losses.
1.2.2 Associate companies
An associate is an entity over which the group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy
decisions of the investee. The results, assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-
acquisition changes in the group's share of the net assets of the associate, less any impairment in the value of individual
investments. Losses of the associates in excess of the group's interest in those associates are not recognised. Any excess of the cost of acquisition over the group's share of the fair values of the identifiable net assets of the associate at the date of acquisition
is recognised as goodwill. Any deficiency of the cost of acquisition below the group's share of the fair values of the
identifiable net assets of the associate at the date of acquisition (i.e. discount on acquisition) is credited in profit and loss in the period of acquisition. Where a group company transacts with an associate of the group, profits and losses are eliminated to the extent of the group's interest in the relevant associate. Losses may provide evidence of an impairment of the asset transferred in which case appropriate provision is made for impairment.
The company carries its investments in associates at cost less accumulated impairment losses.
1.2.3 Joint ventures
Joint ventures are those partnerships or jointly controlled entities over which there is a contractual agreement whereby the group and another venturer undertake an economic activity which is subject to joint control.
The group changed its accounting policy in respect of joint ventures during the year as reflected in
note 1.1.2.
In applying the equity method, account is taken of the group's share of accumulated retained earnings and movements in reserves from the effective dates on which the companies become joint ventures and up to the effective dates of disposal. The share of joint ventures' equity reserves is generally determined from their latest audited financial statements but in some instances unaudited interim results are used.
The company carries its investments in joint ventures at cost less accumulated impairment losses.
1.3 Goodwill
Goodwill arising on consolidation represents the excess of the cost of acquisition over the group's interest in the fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition.
Positive goodwill is recognised as an asset and reviewed for impairment at least annually. Negative goodwill is recognised immediately in net profit or loss.
Any impairment is recognised immediately in profit or loss and is not subsequently reversed.
On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the
determination of the profit or loss on disposal.
1.4 Property, plant and equipment
Land and buildings are recorded at their historical cost. Buildings are depreciated on the straight line basis over their estimated useful lives. Land is not depreciated. Subsequent expenditure relating to an item of property, plant and equipment is capitalised to the carrying amount of the asset when it is
probable that future economic benefits, in excess of the originally assessed standard of performance of the item concerned, will flow to the group. All other subsequent expenditure is recognised as an expense in the period in which it is incurred.
1.6 Impairment of tangible and intangible assets
At each balance sheet date, the group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is
estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years.
A reversal of an impairment loss is recognised as income
immediately.
1.7 Available-for-sale investments
Investments are initially measured at cost, including transaction costs.
Investments are classified as either held-for-trading or
available-for-sale and are measured at subsequent reporting dates at fair value. Where securities are held for trading
purposes, gains and losses arising from changes in fair value are included in net profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is
disposed of or is determined to be impaired, at which time the
cumulative gain or loss previously recognised in equity is
included in the net profit or loss for the period.
1.8 Inventory
Inventories are reported at the lower of cost and net realisable value. The principal bases of determining cost are the first-in, first-out method and the weighted average method. The cost of finished goods and work in progress includes direct costs and appropriate allocation of overheads incurred in bringing the inventories to their present location and condition. Obsolete, redundant and slow-moving inventories are identified and valued at their estimated net realisable value. Net realisable value is the estimate of the selling price in the ordinary course of
business, less the estimated costs of completion, selling and distribution expenses.
1.9 Biological assets
Biological assets, comprising cattle, are reported at fair value, being market prices for similar cattle determined in the active market normally utilised by the group, less estimated point-of-sale costs.
1.10 Trade receivables
Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for
estimated irrecoverable amounts.
1.11 Cash and cash equivalents
Cash and cash equivalents are measured at amortised cost. Bank overdrafts are only included where the group has a legal right of set-off due to cash management arrangements.
1.12 Financial instruments
Financial assets and financial liabilities are recognised on the group's balance sheet when the group becomes a party to the contractual terms of the instrument. Financial instruments include cash and bank balances, investments, receivables, trade creditors, leases, borrowings, equity and derivative financial instruments. The group, in terms of approved policy limits,
manages short term foreign currency exposures relating to trade imports and exports.
1.13 Equity instruments
Equity instruments issued by the company and group are recorded at the proceeds received, net of direct issue costs.
1.14 Derivative financial instruments and hedge accounting
The group's activities expose it primarily to the financial risks of changes in foreign currency exchange rates. The group uses
foreign exchange forward contracts to hedge this exposure. The group does not use derivative financial instruments for
speculative purposes. The use of financial derivatives is
governed by the group's policies approved by the board of
directors, which provide written principles on the use of financial derivatives.
Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity and the ineffective portion is
recognised immediately in the income statement. If the cash flow hedge of a firm commitment or forecasted transaction results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or
liability. For hedges that do not result in the recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss.
For an effective hedge of an exposure to changes in the fair value, the hedged item is adjusted for changes in fair value attributable to the risk being hedged with the corresponding entry in profit or loss. Gains or losses from re-measuring
the derivative, or for non-derivatives the foreign currency
component of its carrying amount, are recognised in profit or loss.
Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer
qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss for the period.
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not carried at fair value with unrealised gains or losses reported in the income statement.
1.15 Derecognition
Financial assets (or portions thereof) are derecognised when the group realises the rights to the benefits specified in the contract, the rights expire or the group surrenders or otherwise loses control of the contractual rights that comprise the financial asset. On derecognition, the difference between the carrying amount of the financial asset and proceeds receivable and any prior adjustment to reflect fair value that had been reported in equity are included in the income statement. Financial liabilities (or a portion thereof) are derecognised when the obligation specified in the contract is discharged, cancelled or expires. On derecognition, the difference between the carrying amount of the financial liability, including unamortised costs, and amount paid for it are included in the income statement.
1.16 Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of
ownership to the lessee. All other leases are classified as
operating leases.
1.17 The group as lessor
Amounts due from lessees under finance leases are recorded as receivables at the amount of the group's net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the group's net investment outstanding in respect of the leases. Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease.
1.18 The group as lessee
Assets held under finance leases are recognised as assets of the group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly
attributable to qualifying assets, in which case they are
capitalised in accordance with the group's general policy on
borrowing costs (see below).
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as incentives to enter into an operating lease are also spread on a straight-line basis over the lease term.
1.19 Retirement benefit costs
Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution schemes where the group's obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme. For defined benefit retirement benefit schemes, the cost of providing
benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised immediately in the period in which they arise.
Past service cost is recognised immediately to the extent that the benefits are already vested and otherwise is amortised on a straight-line basis over the average period until the benefits become vested.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit
obligation as adjusted for unrecognised past service cost and as
reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future
contributions to the plan.
1.20 Bank borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accrual basis to the profit and loss account using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.
1.21 Provisions
Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reliably measured.
1.21.1 Warranty costs
Provisions for warranty costs are recognised at the date of sale of the relevant products, at the directors' best estimate of the expenditure required to settle the group's liability.
The directors estimate the group's liability on all products still under warranty at the balance sheet date. This provision is
calculated based on service histories.
1.21.2 Restructuring costs
Provisions for restructuring costs are recognised when the group has a detailed formal plan for the restructuring that has been communicated to affected parties.
Restructuring provisions comprise mainly employee termination payments, and are recognised in the period in which the group formulates a detailed formal plan for the restructuring.
1.21.3 Environmental and rehabilitation costs
The group subscribes to the maintenance of sound
environmental standards. It provides for environmental and rehabilitation costs, where appropriate.
1.22 Trade payables
Trade payables are not interest-bearing and are stated at their nominal value.
1.23 Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods in the normal course of business, net of discounts, value added taxation and other sales related taxes.
Sales of goods are recognised when goods are delivered and title has passed.
Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. Dividend income from investments is recognised when the shareholders' rights to receive payment have been established.
1.24 Foreign currencies
1.24.1 Foreign currency transactions and balances
Transactions in currencies other than South African Rand are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains and losses arising on retranslation are included in net profit or loss for the period, except for exchange differences arising on non-monetary assets and liabilities where the changes in fair value are recognised directly in equity.
In order to hedge its exposure to certain foreign exchange risks, the group enters into forward exchange contracts.
1.24.2 Foreign subsidiaries
On consolidation, the assets and liabilities of the group's
overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are
translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are classified as equity and transferred to the group's translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of. The financial statements of foreign
subsidiaries and associates and jointly controlled entities that report in the currency of a hyperinflationary economy are
restated in terms of the measuring unit current at the balance sheet date before they are translated into South African Rand. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
1.25 Borrowing costs
Borrowing costs are recognised in profit or loss in the period in which they are incurred.
1.26 Government grants
Government grants are recognised as income when there is
reasonable assurance that the enterprise will comply with the conditions attaching to them and that the grants will be received. Government grants are recognised over the periods necessary to match them with the related costs and are deducted in reporting the related expense.
1.27 Research and development costs
Research and development expenditure is charged to income in the year in which it is incurred.
1.28 Operating profit
Operating profit is stated after charging restructuring costs but before investment income, finance costs, the share of results of joint ventures and associates and negative goodwill.
1.29 Taxation
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary
difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and
liabilities in a transaction that affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries and
associates, and interests in joint ventures, except where the group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income
statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
1.30 Segments
Business segments provide products and services that are
subject to risks and returns that are different. Segment assets include property, plant and equipment, investments, inventories, receivables and cash and cash equivalents. Segment liabilities include all operating liabilities, short term borrowings, non-
current liabilities and minority interests. Capital expenditure includes additions to property, plant and equipment.
1.31 Comparatives
Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current period. In
particular, the comparatives have been adjusted or extended to take into account revised or new statements of GAAP, which the group implemented in the period under review.
Refer to note 42 for a detailed list of the changes.
1.32 Discontinued operations
Discontinued operations are significant distinguishable components of the group's business which have been abandoned or terminated pursuant to a single formal plan, and which represent a separate major line of business or geographical area of operations. The profit or loss on sale or abandonment of a discontinued
operation is determined from the formal discontinuation date.
1.33 Fair value methods and assumptions
The fair value of financial instruments traded in an organised financial market are measured at the applicable quoted prices, adjusted for any transactional costs necessary to realise the assets or settle the liabilities. The fair value of instruments not traded in an organised financial market is determined using a variety of methods and assumptions that are based on market conditions and risks existing at balance sheet date, including independent appraisals and discounted cash flow methods. The fair value determined is adjusted for any transactional costs necessary to realise the assets or settle the liabilities. The
carrying amounts of financial assets and liabilities with a
maturity of less than one year are assumed to approximate their fair values due to the short term trading cycle of these items.
1.34 Dividend cover
Dividend cover is the number of times the dividend declared is covered by unweighted headline earnings per share.
