Tiger Brands

The preparation of these results has been supervised by N Doyle, chief financial officer of Tiger Brands Limited.

The condensed consolidated financial statements are prepared in accordance with the requirements of the JSE Limited Listings Requirements for provisional reports and the requirements of the Companies Act of South Africa applicable to summary financial statements. The Listings Requirements require provisional reports to be prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (IFRS) and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by Financial Reporting Standards Council and to also, as a minimum, contain the information required by IAS 34 Interim Financial Reporting. The accounting policies applied in the preparation of the condensed consolidated financial statements from which the summary financial statements were derived are in terms of International Financial Reporting Standards and are consistent with those accounting policies applied in the preparation of the previous consolidated annual financial statements, except as disclosed in note 11.

Ernst & Young Inc., Tiger Brands Limited’s independent auditors, have audited the consolidated financial statements of Tiger Brands Limited from which the condensed consolidated financial results have been derived. The auditors have expressed an unmodified audit opinion on the consolidated annual financial statements. Any reference to future financial performance included in this announcement has not been audited or reported on by the group’s external auditors. The auditors’ audit report does not necessarily report on all the information contained in this announcement/financial results. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditors’ engagement they should obtain a copy of the auditors’ audit report together with the accompanying financial information from the issuer’s registered office.

Goodwill and indefinite useful life intangible assets are tested for impairment annually (as at 30 September) and when circumstances that indicate the carrying value may be impaired. The group’s impairment tests for goodwill and intangible assets with indefinite useful lives are based on the value-in-use calculations. The key assumptions used to determine the recoverable amount for the different cash-generating units was a discount rate of between 13,5% and 17,6% (2018: 12,5% and 17,9%) and a terminal growth rate 5,5% (2018: 1% to 5,5%). During the current period, goodwill relating to VAMP (R6,0 million) and Davita (R212,0 million) was impaired. Property, plant and equipment of R96,0 million was impaired in VAMP.

Davita is included in the Exports and International cash-generating unit. The impairment arose as a result of the consistent risks associated with key export markets, with lower sales projected for Nigeria and Mozambique, as well as lower sales forecast for the powdered seasoning brand, Benny. A five-year discounted cash flow model was used with the post-tax discount rate utilised for the purposes of impairment testing of 17,6% (2018: 17,9%). A +1%/-1% change in the post-tax discount rate would result in an approximately +/-R140,0 million change in the valuation. There is currently an ongoing legal dispute with a Nigerian distributor. Should management be unsuccessful in the legal proceedings, the potential change to the valuation would be approximately between R39,6 million and R92,3 million.

Included in the Consumer Brands segment is the impairment of VAMP’s property, plant and equipment which was evaluated and an impairment of R96,0 million was recorded. The impairment was due to the declining profits in the VAMP business during the current period. The five-year discounted cash flow model was compared to the valuation report (fair value less costs to sell) which resulted in a higher value and in terms of IAS 36, with the higher value being used in the impairment testing.

Tax rate reconciliation

As a consequence of the decision taken to unbundle the company’s investment in Oceana, the company ceased to equity account the earnings of Oceana with effect from 1 December 2018. From this date, the investment has been accounted for as a held-for-sale asset on the balance sheet. The Brimstone sale was concluded on 20 March 2019. The total sale consideration amounted to R581,4 million, giving rise to a capital profit of R281,9 million and a release of R26,4 million on FCTR. On 3 April 2019, the board formally approved the unbundling of the remaining 49 104 774 shares that the company held in Oceana (equating to approximately 36,2% of the issued share capital of Oceana) (the unbundled shares) by way of a distribution in specie in terms of the company’s memorandum of incorporation. This was concluded on 29 April 2019. The dividend in specie gives rise to a realised fair value gain in terms of IFRS 5 of R1 630,4 million. This gain has no impact on HEPS and it has been excluded for headline earnings purposes. Further, Tiger Brands group received 2 671 457 Oceana shares in respect of the 10 326 758 treasury shares in Tiger Brands held by its wholly owned subsidiary, Tiger Consumer Brands Limited. These shares are being sold into the market at a market-related price. This sale has given rise to an abnormal capital profit of R86,9 million. The capital profit has no impact on HEPS and it has been excluded for headline earnings purposes. The impact of the unbundling on the empowerment entities in the Tiger Brands group has been appropriately accounted for.

Accounting for investment in associate

The group has a 37,4% investment in National Foods Holdings Limited (NFH), an associate company incorporated in Zimbabwe and which operates throughout Zimbabwe.

On 11 October 2019, the Public Accountants and Auditors Board of Zimbabwe classified Zimbabwe as a hyperinflationary economy in accordance with the provisions of IAS 29 Financial Reporting in Hyperinflationary Economies (IAS 29), applicable to entities operating in Zimbabwe with financial periods ended on or after 1 July 2019.

Tiger Brands concurs with this classification, supported by the following factors:

• The significant deterioration of the interbank real time gross settlement (RTGS) dollar and Zimbabwe dollar (ZWL$) exchange rates, the official currencies adopted in Zimbabwe during the period.
• The rapid increase in year-on-year Zimbabwe inflation rates, from 21% in October 2018, as published by the Reserve Bank of Zimbabwe (RBZ), to a calculated 290% in September 2019 based on the RBZ published CPI index.

The equity-accounted results of NFH included in these results have therefore been prepared in accordance with IAS 29, with the following key accounting principles and judgements applied by the group:

• Hyperinflation accounting requires transactions and balances of each reporting period presented to be stated in terms of the measuring unit current at the end of the reporting period in order to account for the loss of purchasing power during the period. The group has elected to use the Zimbabwe Consumer Price Index (CPI) as the measuring unit (or general price index) to restate amounts as CPI provides an observable indication of the change in the price of goods and services.
• The carrying amounts of non-monetary assets and liabilities carried at historical costs are restated to reflect the change in the general price index.
• All items recognised in the statement of comprehensive income at historical costs are restated by applying the change in the general price index from the dates when these items were initially earned or incurred.
• Gains or losses on the resulting net monetary position are recognised in the statement of comprehensive income and included in our share of associate’s income.
• Impairment losses are recorded in the statement of comprehensive income if the remeasured value of assets exceeds the estimated recoverable amount and included in our share of associate’s income.
• The application of IAS 29 on a retrospective basis within the statement of comprehensive income of NFH has resulted in the recognition of both a gain on the net monetary position and an impairment loss on the revalued assets in the current and prior periods.

As the group’s presentation currency is not that of a hyperinflationary economy, the comparative information of the group’s financial results relating to NFH is not restated. Any difference between our share of NFH adjusted equity balance after applying IAS 29 and the balance previously recorded by the group as at 30 September 2019 is recognised in other comprehensive income as part of foreign currency translations for the current period.

Exchange rates applied in translating the results of investment in associate

During the current and prior period under review, the following changes to the functional and presentation currencies of NFH occurred:

• Since the adoption of multiple currencies by the Zimbabwean government in 2009, entities in Zimbabwe were operating in a multi-currency regime. As a result, prior to 1 October 2018, the US dollar was designated as the functional and presentation currency of NFH.
• On 1 October 2018, following the directive issued by the RBZ, the RTGS dollar was adopted as the functional and presentation currency of NFH. The application of the change in functional currency was applied prospectively. As disclosed in the accounting policies, judgement was applied in the estimation and application of exchange rates used when translating the results of NFH for the 2019 financial year. Inputs considered in this estimate include the official inflation rate and the premium at which Old Mutual shares trade on the Zimbabwe Stock Exchange versus on the JSE.
• On 24 June 2019, the RBZ introduced statutory instrument 142 of 2019 resulting in the renaming of the RTGS dollar to the Zimbabwe dollar (ZWL$), and the ZWL$ being the only form of legal tender in the country. The ZWL$ was therefore adopted as the functional and presentation currency of NFH prospectively from this date. In line with the judgements applied during the 2019 financial year, management assessed that the official interbank closing exchange rate of 1,00 ZWL$ to the South African rand and this was therefore used when translating the result of NFH.

The results and net asset value of NFH have been translated into the group’s presentation currency at the closing exchange rate, in accordance with hyperinflationary provisions of IAS 21 The Effects of Changes in Foreign Exchange Rates.

IFRS 9 replaces IAS 39 and addresses the classification, measurement and derecognition of financial assets and liabilities. IFRS 9 introduces new rules for hedge accounting and a new impairment model for financial assets. The group has adopted IFRS 9 and applied the new rules using a modified retrospective approach from 1 October 2018. Comparatives for 2018 have not been restated.

Classification and measurement

Given the nature of the entity’s financial instruments, the adoption of IFRS 9 did not have a significant impact on the classification and measurement as detailed in the table below.

There have been no significant changes in the measurement of the above instruments.

* FVTPL – Fair value through profit or loss.

Impairment

In terms of IFRS 9, the group has applied the expected credit loss (ECL) model rather than the incurred loss model. The calculation of ECLs incorporates forward-looking variables which include potential risks in the current economic environment, historic trends and management judgement. The group did not present an adjustment to opening retained earnings and its impairment losses/reversals determined in accordance with IFRS 9 separately in the statement of profit or loss as the amounts are not material. The reason why the impact was not material was due to the fact that a large percentage of the receivables book is covered by credit insurance and therefore there is limited credit risk even when considering forward-looking variables which include potential risks in the current economic environment, historic trend and expert management judgement. In terms of intercompany amounts and investments, the group evaluates potential impairments based on the net asset value of the subsidiary company and it’s liquidity.

IFRS 16 introduces significant changes to lease accounting as it removes the distinction between operating and finance leases under IAS 17 and requires a lessee to recognise a right-of-use asset and a lease liability at commencement for all leases, except for short-term leases and leases of low value assets. IFRS 16 will be effective for the group for the financial year commencing 1 October 2019.

IFRS 16 will impact most significantly the group’s leases relating to property, plant and equipment and vehicles. The group has elected to apply IFRS 16 using the modified retrospective approach. As prescribed by IFRS 16, lease liabilities are measured at the present value of the remaining lease payments discounted at the incremental borrowing rate at the date of initial application. The group has elected to measure right-of-use assets on transition date at their carrying amounts as if IFRS 16 had applied since the lease commencement dates, discounted using the incremental borrowing rate at the date of initial application. Right-of-use assets relating to new leases are measured at the amount of initial measurement of the lease liability plus initial direct costs. As part of the modified retrospective transition approach. The group has elected to apply the practical expedient which allows a single discount rate to be applied to a portfolio of leases with reasonably similar characteristics.

As an accounting policy election, the group will apply the following recognition exemptions, which allow for certain lease payments to be expensed over the lease term as opposed to recognising a right-of-use asset and related lease liability on the lease commenced date.

• Short‐term leases – these are leases with a lease term of 12 months or less; and
• Leases of low value assets – these are leases where the underlying asset is of low value.

The group’s assessment determined that the right-of-use asset and lease liability to be recognised on adoption of the standard are estimated to an amount to R400,7 million and R463,4 million respectively.

The net impact on profit or loss is not expected to be material. Rental expense currently disclosed as part of operating expenditure will be replaced with depreciation and finance costs.

Some indicative offers were received in respect of the sale of the VAMP business and a formal due diligence process has commenced. As such, the determination of whether the VAMP business should be disclosed and measured as held for sale in terms of IFRS 5 as at 30 September 2019 is a significant judgement area. In applying this judgement, specific consideration was given to whether it is highly probable that the sale will be completed within one year from 30 September 2019. Given the early stages of the due diligence process and the uncertainties inherent in the VAMP business and the general South African economy, it was determined that this threshold was not met and therefore IFRS 5 was not applied at 30 September 2019.

Subsequent to 30 September 2019, no acceptable offers were made for Deli Foods and it was announced that the business would be closed down.

With the exception of the closure of Deli Foods, there are no other material subsequent events that occurred during the period subsequent to 30 September 2019.