JOHANNESBURG SOCIAL HOUSING COMPANY SOC Ltd (Registration number 2003/008063/07) Financial statements for the year ended 30 June 2014

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1 Financial statements for the year ended 30 June 2014

2 General Information COUNTRY OF INCORPORATION AND DOMICILE South Africa NATURE OF BUSINESS AND PRINCIPAL ACTIVITIES JOSHCO is appointed as the preferred implementing agent for social and institutional housing developments in the City of Johannesburg and to: a) Manage Council owned rental stock; b) Manage and refurbish staff and public hostels; c) Develop new rental stock and to implement other mutually agreed housing developments; d) Provide housing management services and turnaround strategies DIRECTORS REGISTERED OFFICE BUSINESS ADDRESS Ms. Z Jacobs (Chairperson) Mr. R Gallocher (Accounting Officer) Ms. N Tshabalala Mr. M Mphahlele Ms. G Sengoara Mr. I Makopo Dr. L Matlhape Ms. T Sethaelo Dr. DW Thwala Ms. B Majola Mr. V Naidoo (Chief Financial Officer) 137 Sivewright Avenue New Doornfontein st Floor 137 Sivewright Avenue 2094 POSTAL ADDRESS P O Box New Doornfontein 2028 The City of Johannesburg Metropolitan Municipality BANKERS AUDITORS SECRETARY Standard Bank of South Africa The Auditor General South Africa (AGSA) Registered Auditors Ms. Celiwe Nkosi COMPANY REGISTRATION NUMBER 2003/008063/07 PREPARER OF FINANCIAL STATEMENTS AUDIT OF FINANCIAL STATEMENTS These financial statements were internally prepared by the Management Accountant and reviewed by the CFO These financial statements have been audited in compliance with the applicable requirements of the Companies Act 71of 2008 and the MFMA Act 56 of 2003

3 Index The reports and statements set out below comprise the annual financial statements presented to the City Council of the Johannesburg Metropolitan Municipality: Index Page Directors Responsibilities and Approval 3 Audit Committee Report 4-5 Directors' Report 6-10 Company Secretary s Certification 11 Statement of Financial Position 12 Statement of Financial Performance 13 Statement of Changes in Net Assets 14 Cash Flow Statement 15 Statement of Comparison of Budget and Actual Amounts 16 Accounting Policies Notes to the Financial Statements P a g e

4 Directors Responsibilities and Approval The directors are required by the Municipal Finance Management Act (Act 56 of 2003) (MFMA) and the Companies Act (Act 71 of 2008) to maintain adequate accounting records and are responsible for the content and integrity of the financial statements and related financial information included in this report. It is the responsibility of the directors to ensure that the financial statements fairly present the state of affairs of the company and the results of its operations and cash flows for the period and conforms with South African Statements of Generally Recognized Accounting Practice (GRAP). The AGSA is required to express an independent opinion on the financial statements and is given unrestricted access to all financial records and related data. The financial statements are based upon appropriate accounting policies consistently applied and supported by reasonable and prudent judgments and estimates. The directors acknowledge that they are responsible for the system of internal financial control established by the entity and place considerable importance on maintaining a strong control environment. To enable the directors to meet these responsibilities, the directors set standards for internal control aimed at reducing the risk of error or deficit in a cost effective manner. The standards include the proper delegation of responsibilities within a clearly defined framework, effective accounting procedures and adequate segregation of duties to ensure an acceptable level of risk. These controls are monitored in the company and all employees are required to maintain the highest ethical standards in ensuring the company s business is conducted in a manner that in all reasonable circumstances is above reproach. The focus of risk management in the company is on identifying, assessing, managing and monitoring all known forms of risk across the company. While operating risk cannot be fully eliminated, the company endeavors to minimize it by ensuring that appropriate infrastructure, controls, systems and ethical behaviour are applied and managed within predetermined policies and procedures. The directors are of the opinion, based on the information and explanations given by management that the system of internal control provides reasonable assurance that the financial records may be relied on for the preparation of the annual financial statements. However, any system of internal financial control can provide only reasonable, and not absolute, assurance against material misstatement or deficit. The directors have reviewed the company s cash flow forecast for the year ending 30 June 2014 and, in the light of this review and the current financial position, they are satisfied that the company has or has access to adequate resources to continue in operation for the foreseeable future. The entity is dependent on the City of Johannesburg Metropolitan Municipality for continued funding of operations. The annual financial statements are prepared on the basis that the company is a going concern and that the City of Johannesburg Metropolitan Municipality has neither the intention nor the need to liquidate or curtail materially the scale of the company. Although the directors are primarily responsible for the financial affairs of the company, they are also supported by the company's internal auditors and by management. The financial statements set out on pages 12 to 51, which have been prepared on the going concern basis, were approved by the directors on 29 August 2014 and were signed on their behalf by: Ms. Z Jacobs (Chairperson) Mr. R Gallocher (Accounting Officer) 3 P a g e

5 Audit Committee Report We are pleased to present our report for the financial year ended 30 June Audit committee members and attendance: The audit committee consists of the members listed hereunder and they have met 6 times during the year. NAME OF AUDIT COMMITTEE MEMBERS MEMBERSHIP MEETINGS ATTENDED TOTAL NUMBER OF MEETINGS 6 M. Mphahlele Non-Executive 5 E. Tait# Independent 4 K. Govender# Independent 4 K. Mdutshane# Independent 4 R. Hill* Independent 1 H. Moolla* Independent 1 *Appointed on 20Feb2014 #Retired on 20Feb2014 Audit Committee responsibility We report that we have adopted appropriate formal terms of reference in our charter in line with the requirements of section 166(2) (a) of the MFMA. We further report that we have conducted our affairs in compliance with this charter. The effectiveness of internal control and risk management The system of internal controls applied by the entity over financial and risk management is effective, efficient and transparent in line with the MFMA and the King III Report on Corporate Governance. Internal audit provides the Audit Committee and management with assurance that the internal controls are appropriate and effective. This is achieved by means of the risk management process, as well as the identification of corrective actions and suggested enhancements to the controls and processes. From the various reports of the Internal Auditors, the Audit Report on the annual financial statements, and the management report of the AGSA, it was noted that no matters were reported that indicate any material deficiencies in the system of internal control or any deviations there from. Accordingly, we can report that the system of internal control over financial reporting for the period under review was efficient and effective. The quality of in year management and monthly/quarterly reports submitted were in terms of the MFMA and the Division of Revenue Act. We are satisfied with the content and quality of quarterly internal audit reports prepared and issued by the Internal Auditors of the entity during the year under review. Evaluation of financial statements We have: reviewed and discussed the financial statements to be included in the annual report*, with the AGSA and management. reviewed the Auditor-General of South Africa's management report and management s response thereto*; reviewed the applicable accounting policies and practices; reviewed the entities compliance with legal and regulatory provisions; reviewed significant adjustments resulting from the audit*. * To be determined subsequent to the audit from the AGSA. 4 P a g e

6 Audit Committee Report We concur with and accept the Auditor-General of South Africa's report on the financial statements, and are of the opinion that the audited financial statements should be accepted and read together with the report of the Auditor- General of South Africa. Internal audit We are satisfied that the outsourced internal audit function is operating effectively and that it has addressed the risks pertinent to the entity and its audits. Auditor-General South Africa The audit committee has met with the Auditor-General of South Africa to ensure that there are no material unresolved issues. We are satisfied that the auditor is independent of the company. Chairperson of the Audit Committee Date: 5 P a g e

7 Directors' Report The directors submit their report for the year ended 30 June INCORPORATION The company was incorporated on 2 April 2003 and obtained its certificate to commence business on the same day. 2. REVIEW OF ACTIVITIES Main business and operations JOSHCO is appointed as the preferred implementing agent for social and institutional housing developments in the City of Johannesburg Metropolitan Municipality and to: manage council owned rental stock; manage and refurbish staff and public hostels; develop new rental stock and to implement other mutually agreed housing developments; and provide housing management services and turnaround strategies. We draw attention to the fact that the substance of the Service Delivery Agreement between JOSHCO and the City of Johannesburg Metropolitan Municipality is that of an operating lease. The agreement is currently being amended to include the leasing agreement of the rental stock. The company operates in South Africa. During the year ended 30 June 2014 there were no major changes in the activities of the business. The financial position of the company shows a net asset position of R (2013: R ). Net surplus of the entity was R (2013: surplus R ) after taxation of R (2013: R ). 3. GOING-CONCERN The existence of the company is partially dependent on the continued support of its parent, The City of Johannesburg Metropolitan Municipality, by way of management fees/subsidies paid each year in terms of a service delivery agreement entered into between the company and the City of Johannesburg Metropolitan Municipality. The annual financial statements have been prepared on the basis of accounting policies applicable to a going-concern. The basis presumes that funds will be available to finance future operations and that the realization of assets and settlement of liabilities, contingent obligations and commitments will occur in the ordinary course of the business. We draw attention to the fact that at 30 June 2014, the company had an accumulated surplus of R (2013: R ) and that the company's current assets exceed its current liabilities by R (2013: R ). 4. SUBSEQUENT EVENTS The directors are not aware of any matter or circumstance arising since the end of the financial year, to date of this report, not otherwise dealt with in the financial statements, which significantly affect the financial position of the company or the results of its operations that would require adjustments to or disclosure in the financial statements. 5. DIRECTORS' PERSONAL FINANCIAL INTEREST For the financial year under review, there have been no related party transactions that JOSHCO engaged which involved transactions with directors of the organization. Such declaration is also made by individual directors in the official records of JOSHCO.. 6 P a g e

8 Directors' Report 6. ACCOUNTING POLICIES The annual financial statements were prepared in accordance with Statements of Generally Recognized Accounting Practice (GRAP) as the prescribed framework by National Treasury, including any interpretations of Statements issued by the Accounting Practices Board and International Financial Reporting Standards (IFRS). 7. SHARE CAPITAL There were no changes in the authorized or issued share capital of the company during the year under review. 8. BORROWING LIMITATIONS The directors may authorize borrowing by the company subject to approval by the City of Johannesburg Metropolitan Municipality. 9. CHANGES TO ASSETS AND LIABILITIES There were no significant changes to non-current assets and non-current liabilities. 10. DIRECTORS As per resolution at the AGM on the 20th February 2014, the sole shareholder, the City of Johannesburg Metropolitan Municipality resolved that the directors would be represented as follows: Initial and Surname Membership Effective Date Ms Z Jacobs (Chairperson) Non-Executive Reappointed Ms N Sethaelo Non-Executive Reappointed Ms N Tshabalala Non-Executive Reappointed Dr DW Thwala Non-Executive Reappointed Mr I Makopo Non-Executive Reappointed Dr L Matlhape Non-Executive Reappointed Ms G Sengoara Non-Executive Reappointed Mr M Mphahlele Non-Executive Reappointed Ms B Majola Non-Executive Appointed (20Feb2014) Mr R Gallocher Executive No Change Mr V Naidoo Executive Appointed (20Feb2014) The following member was retired in terms of the abovementioned resolution on the 20 February 2014: Initial and Surname Membership Effective Date Mr E Maphatsoe Non-Executive Retired (20Feb2014) 11. SECRETARY The secretary of the company is Ms. Celiwe Nkosi. 7 P a g e

9 Directors' Report 12. CORPORATE GOVERNANCE General The Board of Directors are committed to business integrity, transparency and professionalism in all its activities. As part of this commitment, the Directors support the highest standards of corporate governance and the on-going development of best practice. The Johannesburg Social Housing Company SOC Ltd confirms and acknowledges its responsibility to total compliance with the Code of Corporate Practices and Conduct ("the Code") laid out in the King III Report on Corporate Governance for South Africa. The directors confer the responsibilities of management in this respect, at Board meetings and monitor the company's compliance with the code on a quarterly basis. Board of directors The Board: retains full control over the company, its plans and strategy; acknowledges its responsibilities as to strategy, compliance with internal policies, external laws and regulations, effective risk management and performance measurement, transparency and effective communication by the company, both internally and externally; is of a unitary structure comprising: - 9 non-executive directors, all of whom are independent directors as defined in the Code; and - 2 executive directors, who are the Chief Executive Officer and Chief Financial Officer. Chairperson and chief executive The Chairperson is a non-executive and independent director (as defined by the Code). The roles of Chairperson and Chief Executive are separate, with responsibilities divided between them, so that no individual has unfettered powers of discretion. Remuneration The upper limits of the remuneration of the Chief Executive Officer and all executive managers of the company are determined by the parent municipality. The Board determines the remuneration within the above mentioned limits. Board and Board Sub-Committee meetings The board of directors has met on 8 separate occasions during the financial year. Of these meetings, 4 meetings were ordinary and 4 being special meetings to discuss urgent business, such as approval of financial statements. The directors are scheduled to attend 4 ordinary meetings per annum, being one meeting per quarter. Non-executive directors have access to all members of management of the company. Attendance at board and subcommittee meetings was as follows: 8 P a g e

10 Directors' Report NAME OF BOARD MEMBER BOARD CORPORATE SUPPORT AUDIT DEVELOPMENT RISK SOCIAL AND ETHICS MEETINGS REQUIRED TO BE ATTENDED MEETINGS ATTENDED MEETINGS ATTENDED (%) Z. Jacobs % T. Sethaelo % N. Tshabalala % D.W. Thwala % I. Makopo % L. Matlhape % G. Sengoara % B. Majola* % M. Mphahlele % R. Gallocher % V. Naidoo % *Appointed on 20Feb2014 Audit Committee For the year ended 30 June 2014 the Chairman of the Audit Committee was Mr. M Mphahlele who is also a board member. The committee met 6 times during the year to review matters necessary to fulfill its role. In terms of Section 166 of the Municipal Finance Management Act, the City of Johannesburg Metropolitan Municipality, as a parent municipality, must appoint members of the Audit Committee. Notwithstanding that non-executive directors appointed by the parent municipality constituted the municipal entities Audit Committee; National Treasury policy requires that parent municipalities should appoint further members of the company s audit committee who are not directors of the municipal company onto the audit committee. The City of Johannesburg, as a parent municipality, was satisfied that the Audit Committee of the company is properly constituted to fulfill its role and to advise the Board of its responsibilities as provided in Section 166 of the Municipal Finance Management Act. Risk Management Committee The Risk Management Committee has had 4 meetings during the financial year. Mr. R Hill, a non-executive director, is the Chairperson of the sub-committee which is made up of the Executive Directors and all Senior Managers of the company. Corporate Support Committee There have been a total of 4 Committee meetings convened during the financial year. The committee currently consists of the following members: L Matlhape (Chairperson) N Tshabalala E Mphatsoe R Gallocher (CEO) Non-Executive Director Non-Executive Director Non-Executive Director Executive Director 9 P a g e

11 Directors' Report Development Committee There have been a total of 4 Committee meetings during the financial year. The Committee currently consists of the following members: G Sengoara (Chairperson) M Mphahlele T Sethaelo D.W Thwala R Gallocher (CEO) V Naidoo (CFO) Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Executive Director Executive Director Internal audit The company has outsourced its internal audit function to Business Innovation Group (Pty) Ltd. The appointment of an internal auditor is in compliance with the Municipal Finance Management Act, Social and Ethics Committee The committee held its first ordinary meeting at the beginning of the financial year. The committee consists of the following members: M Tshabalala (Chairperson) Z Jacobs R Gallocher (CEO) Non-Executive Director Non-Executive Director Executive Director 13. ECONOMIC ENTITY The company's parent municipality is The City of Johannesburg Metropolitan Municipality incorporated in South Africa, in terms of the Municipal Systems Act. 14. INTEREST IN JOINTLY CONTROLLED ENTITIES Name of Jointly controlled entity Net income JOSHCO / Madulamoho Joint Venture (JMJV) R The main transactions between JOSHCO and the JMJV were accounts receivable in respect of provincial subsidies payable by the JMJV to JOSHCO. JOSHCO has also accounted for its 55% share of the profit from the joint venture in its consolidated financial statements amounting to R (2013: R ). 15. SPECIAL RESOLUTIONS The company did not pass any special resolutions during the current year. 10 P a g e

12 Company Secretary s Certification Declaration by the company secretary in respect of Section 88(2) (e) of the Companies Act In terms of Section 88(2)(e) of the Companies Act 71 of 2008, as amended, I certify that the company has lodged with the Commissioner all such returns as are required of a public company in terms of the Companies Act and that all such returns are true, correct and up to date. Ms. C Nkosi Company Secretary 11 P a g e

13 Statement of Financial Position as at 30 June 2014 Figures in Rand Note(s) ASSETS Current Assets Inventories Loans to parent municipality Receivables from exchange transactions VAT receivable Cash and cash equivalents Non-Current Assets Property, plant and equipment Intangible assets Investment in joint venture Deferred tax Total Assets LIABILITIES Current Liabilities Loans from group companies Loans from parent municipality Borrowings - DBSA Current tax payable Finance lease obligation Operating lease liability Payables from exchange transactions VAT payable Deferred income from non-exchange transactions Provisions Non-Current Liabilities Borrowings - DBSA Finance lease obligation Deferred income from non-exchange transactions Total Liabilities Net Assets NET ASSETS Share capital Accumulated surplus Total Net Assets P a g e

14 Statement of Financial Performance Figures in Rand Note(s) Revenue Rendering of services (Exchange transaction) Rental facilities (Exchange transaction) Fair value adjustments (36 776) ( ) Utility Recoveries (Exchange transaction) Other income (Exchange transaction) Interest received (Exchange transaction) Dividends received (Exchange transaction) Government grants & subsidies Capital grants realized Total revenue Expenditure Governance & employee costs ( ) ( ) Other housing management costs ( ) ( ) Depreciation and amortization 31 ( ) ( ) Finance costs 32 ( ) ( ) Repairs and maintenance ( ) ( ) Contracted services 34 ( ) ( ) General Expenses 24 ( ) ( ) Total expenditure ( ) ( ) Operating surplus (Loss) gain on disposal of assets and liabilities (57 269) Profit / (Loss) from investment in JV (22 512) Surplus before taxation Taxation Surplus for the year P a g e

15 Statement of Changes in Net Assets Note(s) Share Accumulate Total Net Figures in Rand Capital d Surplus Assets Balance at 01 July 2012 Changes in net assets - Surplus for the year Opening balance as previously reported at 01July 2013 Adjustments - Prior year error 47 Restated Balance at 01 July 2013 Changes in net assets Surplus for the year ( ) ( ) Balance at 30 June P a g e

16 Cash Flow Statement Figures in Rand Note(s) Cash flows from operating activities Receipts Sale of goods and services Grants Interest income Dividends received Other cash item Payments Employee costs ( ) ( ) Suppliers ( ) ( ) Finance costs ( ) ( ) Other payments ( ) - ( ) ( ) Net cash flows from operating activities Cash flows from investing activities Purchase of property, plant and equipment 8 ( ) ( ) Proceeds from sale of property, plant and equipment Purchase of other intangible assets 9 (35 596) (62 702) Loans advanced to economic entities ( ) (34 401) Net cash flows from investing activities ( ) ( ) Cash flows from financing activities Repayment of borrowings - DBSA ( ) ( ) Repayment of shareholders loan ( ) ( ) Finance lease payments (82 491) (96 382) Deferred income ( ) Net cash flows from financing activities ( ) Net increase/(decrease) in cash and cash equivalents ( ) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year P a g e

17 Statement of Comparison of Budget and Actual Amounts Budget on Cash Basis Figures in Rand Approved budget Adjustments Final Budget Actual amounts on comparable basis Difference between final budget and actual Reference Statement of Financial Performance Revenue Revenue from exchange transactions Rendering of services ( ) Rental facilities and equipment ( ) ( ) Fair value adjustment (36 776) (36 776) Recoveries Other income Interest received - investment Total revenue from exchange transactions ( ) ( ) Revenue from non-exchange transactions Taxation revenue Government grants & subsidies Transfer revenue Capital grants realized Total revenue from nonexchange transactions Total revenue ( ) ( ) Expenditure Governance and staff costs ( ) ( ) ( ) ( ) Other project costs ( ) ( ) ( ) ( ) Note 46 Depreciation and amortization ( ) - ( ) ( ) Finance costs ( ) - ( ) ( ) ( ) Repairs and maintenance ( ) ( ) ( ) ( ) Note 46 Contracted Services ( ) ( ) General Expenses ( ) ( ) ( ) Total expenditure ( ) ( ) ( ) Operating surplus ( ) Loss on disposal of assets and (57 269) (57 269) liabilities Income from equity accounted investments (22 512) (22 512) Surplus before taxation ( ) Taxation ( ) ( ) NET SURPLUS P a g e

18 Accounting Policies 1. Presentation of Financial Statements The annual financial statements have been prepared in accordance with the Standards of Generally Recognized Accounting Practice (GRAP) including any interpretations, guidelines and directives issued by the Accounting Standard Board (ASB). In the absence of effective GRAP standards, Directive 5 dated March 2009 from the ASB provides the continued application of International Financial Reporting Standards (IFRS). The recognition and measurement principles in the GRAP and IFRS statement do not differ as a result in material differences in items presented and disclosed in the financial statements. The following additional GRAP s tandards, as prescribed by the ASB, have been adopted by JOSHCO in the 2013/14 financial year: Standard GRAP 25 Description Employee Benefits All other accounting policies were consistent with the previous period. The following GRAP standards have been approved by the ASB and are effective from the 1 April The application of these additional standards would therefore be applicable to JOSHCO in the 2015/16 financial year: Standard GRAP 18 GRAP 105 GRAP 106 GRAP107 Description Segment Reporting Transfer of Functions between Entities Under Common Control Transfer of Functions between Entities Not Under Common Control Mergers The ASB has further approved the following standards but the effective date has not yet been determined and therefore the application of these standards will be determined in the foreseeable future in terms of the effective date: Standard GRAP 20 GRAP 32 GRAP 108 Description Related Party Disclosures Service Concession Arrangements: Grantor Statutory Receivables 1.1 Consolidation Interests in joint venture The Joint venture relates the BG Alexandra property of which the shareholding is as follows: - JOSHCO SOC Ltd 55% - Madulamoho (Pty) Ltd 45% Total Shareholding 100% Madulamoho (Pty) Ltd have a 35 year lease over the property BG Alexandra from Gauteng Provincial Housing Department and which commenced in September JOSHCO through its shareholder has obtained capital funding to renovate the property and to which the leasehold improvement must be depreciated over the remaining period of the lease. An interest in a jointly controlled company is accounted for using the equity method, except when the investment is classified as held-for-sale in accordance with Standard of GRAP on non-current assets held-for-sale and discontinued operations. Under the equity method, interests in jointly controlled entities are carried in the consolidated statement of financial position at cost adjusted for post-acquisition changes in the company's share of net assets of the joint company, less any impairment losses. Surpluses and deficits on transactions between the company and a joint venture are eliminated to the extent of the company's interest therein. 17 P a g e

19 Accounting Policies 1.2 Significant accounting judgment s and key sources of estimation uncertainty In the application of the accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Fair value estimation The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the company for similar financial instruments. 1.3 Property, plant and equipment Land is stated at historical costs and is not depreciated as it is deemed to have an indefinite life. Property, plant and equipment (excluding land) is stated at historical costs less accumulated depreciation and any impairment losses. The company tests for impairment where there is an indication that the assets may be impaired. Depreciation is calculated on a straight line basis over the assets expected useful life to their estimated residual value. Depreciation commences from the date when the assets are ready for their use and ceases when the asset is derecognized or when the asset has reached the end of its useful life. When significant components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. The following factors were considered to determine useful life of the assets: - Expected usage of the asset; - Expected physical wear and tear of the asset; - Technical obsolescence; and - Legal or other limits on the use of the asset Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount (i.e. impairment losses are recognized). Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit.. The residual value and the useful life of each asset are reviewed at each reporting date. The useful lives of items of property, plant and equipment have been assessed as follows: Item Land Leasehold property Furniture and fixtures Office equipment IT equipment Vehicles Leasehold improvements Average useful life Indefinite Lower of lease period or useful life (3-5 years) 5-8 years 5-8 years 5-8 years 5-8 years Lower of lease period or 3 Years 18 P a g e

20 Accounting Policies The residual value, and the useful life and depreciation method of each asset are reviewed at the end of each reporting date. If the expectations differ from previous estimates, the change is accounted for as a change in accounting estimate. The useful life of technological assets such as computers is set at R1 as these items are expected to have negligible sales value at the end of its useful life. The residual value of all other assets with a cost of less than R5 000 are estimated at 10% of the cost as this is appropriately the maximum amount expected to be recovered on these items if they were disposed. All other items above R5 000 are determined by considering the second hand values of similar items which are already at the age the asset is expected to be at the end of its useful life. 1.4 Intangible assets Intangible assets are carried at cost less any accumulated amortization and any impairment losses. Amortization commences when the intangible assets are ready for their intended use. An intangible asset is regarded as having an indefinite useful life when, based on all relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows or service potential. Amortization is not provided for these intangible assets, but they are tested for impairment annually and whenever there is an indication that the asset may be impaired. For all other intangible assets amortization is provided on a straight line basis over their useful life. The amortization period and the amortization method for intangible assets are reviewed at each reporting date. Amortization is provided to write down the intangible assets on a straight line basis, to their residual value as follows: Item Useful life Computer software 3-8 years Operating Software 3-7 years 1.5 Financial instruments Financial assets and financial liabilities are recognized on JOSHCO's balance sheet when the organization becomes a party to the contractual provisions of the instrument. All "regular way" purchases and sales of financial assets are initially recognized using trade date accounting. Financial instruments are initially measured at fair value, which includes transaction costs. Subsequent to initial recognition the instruments are measured as set out below: Financial assets JOSHCO's principle financial assets are Loans to group companies, accounts and other receivables and cash and cash equivalents. At each end of the reporting period the company assesses all financial assets, other than those at fair value through surplus or deficit, to determine whether there is objective evidence that a financial asset or group of financial assets has been impaired. Reversals of impairment losses are recognized in surplus or deficit except for equity investments classified as availablefor-sale. Impairment losses are also not subsequently reversed for available-for-sale equity investments which are held at cost because fair value was not determinable. 19 P a g e

21 Accounting Policies Loans to / (from) group companies These include loans to parent municipality, subsidiaries, joint ventures and associates and are recognized initially at fair value plus direct transaction costs. Subsequently these loans are measured at amortized cost using the effective interest rate method, less any impairment loss recognized to reflect irrecoverable amounts. On loans receivable an impairment loss is recognized in profit or loss when there is objective evidence that it is impaired. The impairment is measured as the difference between the investment s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the investment s recoverable amount can be related objectively to an event occurring after the impairment was recognized, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortized cost would have been had the impairment not been recognized. Accounts and Other receivables from exchange transactions Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognized in surplus or deficit when there is objective evidence that the asset is impaired. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The allowance recognized is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the allowance is recognized in surplus or deficit within operating expenses. When a trade receivable is uncollectible, it is written-off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written-off are credited against operating expenses in surplus or deficit. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. These are initially and subsequently recorded at fair value. Financial liabilities JOSHCO's principle financial liabilities are Loans from group companies, accounts and other payables and interest bearing borrowings & overdraft. All financial liabilities are measured at amortized cost, comprising original debts less principle payments and amortizations, except for financial liabilities held for trading and derivative liabilities, which are subsequently measured at fair value. Loans to / (from) group companies As noted in the financial assets above. 20 P a g e

22 Accounting Policies Accounts and other payables Accounts and other payables are initially measured at fair value and are subsequently measured at amortized cost, using the effective interest rates method. Interest bearing borrowings and overdraft Interest bearing borrowings and overdraft are initially measured at fair value, and are subsequently measured at amortized cost, using the effective interest rate method. Gains and losses Gains and losses arising from a change in the fair value of the financial instrument, other than available-for-sale financial asset, are included in net profit or loss in the period in which it arises. Gains and losses arising from a change in the fair value of available-for-sale financial assets are recognized in equity, until the investment is disposed of or is determined to be impaired, at which time the net profit or loss is included in the net profit or loss for the period. De-recognition 1.6 Tax A financial asset as a portion thereof is derecognized when the organization realizes the contractual rights to the benefits specified in the contract, the rights expire, the organization surrenders those rights or otherwise loses control of the contractual rights that comprise the financial asset. On de-recognition, the difference between the carrying amount of the financial asset and the sum of the proceeds receivable and any prior adjustment to reflect the fair value of the asset that had been reported in equity is included in net profit or loss for the period. A financial liability as a part thereof is derecognized when the obligation specified in the contract is discharged, cancelled, or expires. On de-recognition the difference between the carrying amount of the financial liability, including related unamortized costs, and the amount paid for it is included in net profit or loss for the period. The fair values at which the financial instruments are carried at the balance sheet date have been determined using available market values. Where market values are not available, fair values have been calculated by discounting expected future cash flows at prevailing interest rates. The fair values have been estimated using available market information and appropriate valuation methodologies, but are not necessarily indicative of the amounts that the organization could realize in the normal course of business. The carrying amounts of financial assets and financial liabilities with a maturity of less than one year are assumed to approximate their fair value due to the short term trading cycle of these assets. Financial assets and financial liabilities are offset if there is any intention to realize the asset and settle the liability simultaneously and a legally enforceable right to off-set exists. Current tax assets and liabilities Current tax for current and prior periods is, to the extent unpaid, recognized as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess is recognized as an asset. Current tax liabilities / (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the South African Revenue Services (SARS), using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets and liabilities A deferred tax liability is recognized for all taxable temporary differences, except to the extent that the deferred tax liability arises from the initial recognition of an asset or liability in a transaction which at the time of the transaction, affects neither accounting surplus nor taxable profit / (tax loss). 21 P a g e

23 Accounting Policies A deferred tax liability is recognized for all taxable temporary differences, except to the extent that the deferred tax liability arises from: - the initial recognition of goodwill; or - the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction, affects neither accounting surplus nor taxable surplus / (tax deficit). A deferred tax liability is recognized for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, except to the extent that both of the following conditions are satisfied: - the parent, investor or venture is able to control the timing of the reversal of the temporary difference; and - it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is recognized for all deductible temporary differences to the extent that it is probable that taxable surplus will be available against which the deductible temporary difference can be utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that: - is not a business combination; and - at the time of the transaction, affects neither accounting surplus nor taxable surplus / (tax deficit) A deferred tax asset is recognized for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint ventures, to the extent that it is probable that: - the temporary difference will reverse in the foreseeable future; and - taxable surplus will be available against which the temporary difference can be utilized. A deferred tax asset is recognized for the carry forward of unused tax deficit and unused secondary tax on companies (STC) credits to the extent that it is probable that future taxable surplus will be available against which the unused tax deficit and unused STC credits can be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Tax expenses Current and deferred taxes are recognized as income or an expense and included in surplus or deficit for the period, except to the extent that the tax arises from: a transaction or event which is recognized, in the same or a different period, to net assets; or a business combination. Current tax and deferred taxes are charged or credited to net assets if the tax relates to items that are credited or charged, in the same or a different period, to net assets. 1.7 Leases A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. When a lease includes land and buildings elements, the entity assesses the classification of each element separately. 22 P a g e

24 Accounting Policies Finance leases - lessee Finance leases are recognized as assets and liabilities in the statement of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. The discount rate used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease. Lease payments are apportioned between the finance charge and reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of on the remaining balance of the liability. Operating leases lessor Operating lease income is recognized as an income on a month to month basis. Initial direct costs incurred in negotiating and arranging operating leases are added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease revenue. The aggregate benefit of incentives is recognized as a reduction of rental expense over the lease term on a straight-line basis. Income for leases is disclosed under revenue in statement of financial performance. Operating leases lessee Operating lease payments are recognized as an expense on a straight-line basis over the lease term. The difference between the amounts recognized as an expense and the contractual payments are recognized as an operating lease asset or liability. 1.8 Inventories Inventories are initially measured at cost except where inventories are acquired at no cost, or for nominal consideration, and then their costs are their fair value as at the date of acquisition. Subsequently inventories are measured at the lower of cost and net realizable value. Inventories are measured at the lower of cost and current replacement cost where they are held for: distribution at no charge or for a nominal charge; or consumption in the production process of goods to be distributed at no charge or for a nominal charge. The cost of inventories comprises of all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The cost of inventories is assigned using the weighted average cost formula. The same cost formula is used for all inventories having a similar nature and use to the entity. When inventories are sold, the carrying amounts of those inventories are recognized as an expense in the period in which the related revenue is recognized. If there is no related revenue, the expenses are recognized when the goods are distributed, or related services are rendered. The amount of any write-down of inventories to net realizable value or current replacement cost and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value or current replacement cost, are recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. 23 P a g e

25 Accounting Policies 1.9 Share Capital An equity instrument is any contract that evidences a residual interest in the assets of a company after deducting all of its liabilities. Equity instruments issued by the company are classified according to the substance of the contractual arrangements entered into. Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs Employee benefits Short-term employee benefits The cost of short-term employee benefits are recognized in the period in which the service is rendered and are not discounted. The expected cost of compensated absences is recognized as an expense as the employees render services that increase their entitlement or, in the case of non-accumulating absences, when the absence occurs. The expected cost of surplus sharing and bonus payments is recognized as an expense when there is a legal or constructive obligation to make such payments as a result of past performance. Defined contribution plans Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. The company's retirement benefit plan is managed by the parent municipality. Payments made to industry-managed (or state plans) retirement benefit schemes are dealt with as defined contribution plans where the company s obligation under the schemes is equivalent to those arising in a defined contribution retirement benefit plan Provisions and contingencies Provisions are recognized when: the company has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation; and a reliable estimate can be made of the obligation. The amount of a provision is the best estimate of the expenditure expected to be required to settle the present obligation at the reporting date. Where the effect of time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Provisions are reversed if it is no longer probable that an outflow of resources embodying economic benefits or service potential will be required, to settle the obligation Revenue from exchange transactions Revenue is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets, other than increases relating to contributions from owners. An exchange transaction is one in which the municipality receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of goods, services or use of assets) to the other party in exchange. Rental income is accrued on a time proportionate basis over the period of the lease agreement. Rental paid in advance is recognized as a liability in the statement of financial position. 24 P a g e