Accounting policies continued

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1 Accounting policies continued software. These include purchased software and the direct costs associated with the customisation and installation thereof. Development costs recognised as assets are depreciated using the straight-line method over their useful lives, not exceeding a period of ten years. g) Furniture, fittings and other items Furniture, fittings and other items are stated at initial cost less subsequent accumulated depreciation and impairment. Depreciation is calculated to write off the cost of these assets to their estimated residual values on a straight-line basis over their expected useful lives on a component basis. The expected useful lives are generally three to five years. The estimated useful lives and residual values are reviewed annually. h) Replacement and modification expenditure (relate to all categories) Expenditure incurred to replace or modify a significant component of property, plant and equipment is capitalised and any remaining book value of the component replaced is written off immediately in the income statement. Other repair and maintenance expenditure is charged directly to the income statement as incurred. i) Gains and losses Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within the income statement as appropriate. 1.7 Investment property Investment property is property held to generate independent cash flows through rental or capital appreciation, and is carried at fair value with changes in fair value included in the income statement. 1.8 Goodwill Goodwill represents the excess cost of an acquisition over the fair value of the group s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. For the purpose of impairment testing, goodwill is allocated to each of the group s cash generating units expected to benefit from the synergies of the combination. Goodwill is allocated to the group s cash generating units identified according to country of operation and business segment. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. The carrying amount of goodwill is included in computing the gains and losses on the disposal of an entity. Impairment tests are conducted annually on goodwill based on future discounted cash flows and other appropriate methods. 1.9 Impairment adjustments Non-current non-financial assets Non-current non-financial assets are tested for impairment when there is an indication for impairment. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Non-financial assets that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date Financial assets: assets carried at amortised cost The group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the group uses to determine that there is objective evidence of an impairment loss include: significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in interest or principal payments; the group, for economic or legal reasons relating to the borrower s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including: (i) adverse changes in the payment status of borrowers in the portfolio; and (ii) national or local economic conditions that correlate with defaults on the assets in the portfolio. The group first assesses whether objective evidence of impairment exists. The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The asset s carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the group may measure impairment on the basis of an instrument s fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated income statement Financial assets The group classifies its financial assets in the following categories; at fair value through profit and loss or loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. 21 GROUP FIVE 2012 ONLINE SECTION OF INTEGRATED REPORT

2 Notes to the financial statements continued GROUP R Goodwill Net book value At the beginning of the year Impairment charge (24 859) Balance at the end of the year Cost Accumulated impairment (24 859) Balance at the end of the year Per segment Construction Materials There is no unallocated goodwill. In the prior year, the carrying amount of the Construction Materials segment was reduced to its recoverable amount through a recognition of impairment against goodwill. This loss was included in the income statement. This impairment was necessary as a result of a further deterioration of trading conditions and increased uncertainty in the aggregates markets. The reduction in workflow into the Gauteng construction sector had resulted in industry volumes and prices within the aggregates markets dropping substantially below the group's original forecast levels and thus management deemed it appropriate to impair the goodwill carried within the construction materials segment. 11. Associates 11.1 Investment in associates Unlisted associates Shares at cost Group s share of distributable reserves Impairment (3 657) (2 258) Total non-financial instruments The impairment relates to associates for which the recoverability of investment will only be deemed probable once start up of operations is complete and performance profitability established Loan to associates Loan to associate Total financial instruments Total Loan to associates bear interest at an average borrowing rate of 10% and are subject to an estimated repayment term of 24 months. The summarised financial information of the group s share in the assets and liabilities, income and expenditure and cash flows are reflected in Annexure 5 on page

3 In circumstances where interests in associated undertakings or joint venture holdings arise in which the group has no strategic intention, these investments are classified as venture capital holdings and are designated as held at fair value through profit or loss. For equity accounted associates, the combined consolidated financial statements include the attributable share of the results and reserves of associated undertakings. The group s interests in associated undertakings are included in the consolidated balance sheet at cost plus the post-acquisition changes in the group s share of the net assets of the associate. The consolidated balance sheet reflects the associated undertakings net of accumulated impairment losses. All intergroup balances, transactions and unrealised gains and losses within the group that do not reflect an impairment to the asset, are eliminated in full regarding subsidiaries and to the extent of the interest in an associate. Segmental reporting An operating segment is a component of the group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the group s other components, whose operating results are reviewed regularly by the board and for which discrete financial information is available. The group s segmental reporting is presented in the form of a business analysis. The business analysis is presented in terms of the group s three principal business divisions, namely, Asset Management, Wealth & Investment and Specialist Banking. A geographical analysis is also presented in terms of the main geographies in which the group operates representing the group s exposure to various economic environments. For further detail on the group s segmental reporting basis refer to pages 57 to 88 of the divisional review section of the annual report. Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any prior non-controlling interest in the acquiree. For each business combination, the group measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition costs incurred are expensed immediately in the income statement. When the group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and the designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the group s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the income statement. Any contingent consideration to be transferred by the group will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognised in accordance with IAS 39 either in the income statement or as a change to other comprehensive income. If the contingent consideration is classified as equity, it will not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration and amount recognised for noncontrolling interest is less than the fair values of the identifiable net assets acquired, the discount on acquisition is recognised directly in the income statement as a gain in the year of acquisition. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the group s cash-generating units that are expected to benefit from the combination. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash generating units retained. Share-based payments to employees The group engages in equity-settled share-based payments and in certain limited circumstances cash-settled share-based payments in respect of services received from employees. Investec integrated annual report 2012 Annual financial statements 285

4 35. Acquisitions and disposals 2012 Acquisitions Acquisition of Evolution Group plc On 22 December 2011 Investec plc issued ordinary shares at a value of pence each as consideration for the acquisition of the entire issued ordinary share capital of Evolution Group plc (EVG). The acquisition was carried out by way of a scheme of arrangement under section 425 of the UK Companies Act under which each EVG shareholder received new Investec ordinary shares for each EVG scheme share held. On 18 April 2011 Investec Bank plc acquired the entire ordinary share capital of Access Capital Limited and changed its name to Investec Capital Asia Limited (ICAL). ICAL is a licensed entity regulated by the Hong Kong Securities and Futures Commission that has been providing investment banking services to clients based in Greater China since The assets and liabilities at the date of acquisition, goodwill arising on these transactions and total consideration paid are disclosed in the table below: Book value of assets and liabilities Fair value of assets and liabilities 000 EVG ICAL Total EVG ICAL Total Loans and advances to banks Trading securities Investment securities Interests in associated undertakings Derivatives Deferred taxation assets Other assets Property and equipment Intangible assets Goodwill* Current taxation liabilities Deferred taxation liabilities Other trading liabilities Other liabilities Non-controlling interests (158) (158) (158) (158) Net assets/fair value of net assets acquired Issue of shares Less: treasury shares acquired (5 781) (5 781) Fair value of cash consideration Loans and advances to banks at acquisition Fair value of cash consideration (4 098) Net cash inflow * The goodwill arising from the acquisition of EVG consists largely of the benefits expected to arise from the enhancement of the group s Wealth and Investment offering through the combination of EVG s subsidiary, Williams de Broë, with the group s existing wealth and investment business. In the case of ICAL, the goodwill represents the benefits expected to arise from extending the group's investment banking capability to the Hong Kong market. None of the goodwill arising during the year is expected to be deductable for corporation tax purposes. For the post-acquisition period 23 December 2011 to 31 March 2012, the operating income of EVG totalled million and losses before taxation, including integration costs, totalled million. The operating income before impairment losses on loans and advances of Investec would have been million and operating profit would have totalled million, if the acquisition of EVG had been on 1 April 2011 as opposed to 22 December Investec integrated annual report 2012 Annual financial statements 341

5 Notes to the annual financial statements (continued) 35. Acquisitions and disposals (continued) 2012 (continued) Acquisitions (continued) million of costs arising from the integration of acquired subsidiaries and million of direct costs associated to the acquisition have been expensed in the income statement. Disposals There were no significant disposals of subsidiaries during the year ended 31 March Acquisitions Rensburg Sheppards plc (RS) became a wholly owned subsidiary of the Investec group on 25 June Prior to this date, Investec owned 47.1% of RS and it was accounted for as an associate. At acquisition the RS was made up of two principal trading subsidiaries, Rensburg Sheppards Investment Management Limited (RSIM) and Rensburg Fund Management Limited (RFM). RFM was subsequently sold on 18 January 2011 (see below) and RSIM was renamed Investec Wealth & Investment Limited on 31 May As a result of requirements of the new accounting rules of IFRS 3, the group was required to fair value its 47.1% holding in RS at the date it acquired the remaining 52.9%. This has resulted in an exceptional gain of 73.5 million (net of acquisition costs) as set out below. Investec plc issued ordinary shares at a value of 476 pence each as consideration for the acquisition of RS. The acquisition was carried out by way of a scheme of arrangement under section 425 of the UK Companies Act under which each RS shareholder received 1.63 new Investec ordinary shares for each Rensburg scheme share. The assets and liabilities at the date the date of acquisition, goodwill arising on the transaction and total consideration paid are disclosed in the table below: 000 Book value Fair value Loans and advances to banks Investment securities Deferred taxation assets Other assets Property plant and equipment Intangible assets Total assets Deposits by banks Current taxation liabilities Deferred taxation liabilities Other liabilities Subordinated liabilities Liabilities Net assets/fair value of net assets Goodwill* Fair value of consideration Acquisition of 52.9% holding (i.e million shares) on 25 June 2010** Fair value of 47.1% holding (i.e million shares)** Carrying value of 47.1% holding at 25 June Fair value gain arising on acquisition Investec costs of acquisition of 52.9% holding (6 055) Net gain in income statement * The goodwill arising from the acquisition consists largely of the benefits expected to arise from the enhancement of the group s wealth and investment offering through the combination of RS with the group s existing wealth and investment business. None of the goodwill is expected to be deductible for corporation tax purposes. ** As calculated in relation to the 37.9 million Investec plc shares issued for the remaining 52.9% shares in RS at 4.76; which valued RS at approximately 7.76 per share, RS had 43.9 million shares in issue. 342 Investec integrated annual report 2012 Annual financial statements

6 35. Acquisitions and disposals (continued) For the post-acquisition period 26 June 2010 to 31 March 2011, the operating income of RS totalled million and profits before taxation and amortisation of client relationships totalled million. The operating income of Investec would have been million and the operating profit would have totalled million if the acquisition of RS had been on 1 April 2010 as opposed to 25 June On 15 October 2010 the group completed the purchase of the 33.6% non-controlling interest in Start Mortgages Holdings Limited (Start) bringing the group interest in Start to 100%. The net cash inflow on these acquisitions, inclusive of related acquisition costs and net of cash within subsidiaries acquired amounted to million. Disposals The net loss on sale of subsidiaries of million comprises a loss of million on the sale and deconsolidation of investments previously consolidated as subsidiaries, partially offset by a gain of million on the sale of RFM. The net cash inflow on these items amounted to million. At 31 March Long-term assurance business attributable to policyholders Liabilities to customers under investment contracts Investec Employee Benefits Limited (IEB) Investec Assurance Limited Insurance liabilities, including unit-linked liabilities IEB Investec Employee Benefits Limited The assets of the long-term assurance fund attributable to policyholders are detailed below: Investments Other assets Investments above comprise: Interest bearing securities Stocks, shares and unit trusts Deposits Investec Assurance Limited The assets of the long-term assurance fund attributable to policyholders are detailed below: Investments Debtors and prepayments Other assets Assets of long-term assurance fund attributable to policyholders Investments shown above comprise Interest bearing securities Stocks, shares and unit trusts Deposits Investec integrated annual report 2012 Annual financial statements 343

7 Vodacom Group Limited Integrated report Year ended 31 March 2012 > Consolidated annual Notes to the consolidated annual financial statements for the year ended 31 March Basis of preparation The consolidated annual financial statements of the Group have been prepared in accordance with IFRS as issued by the IASB and comply with the AC 500 standards as issued by the Accounting Practices Board, the JSE Listings Requirements and the requirements of the Companies Act of 2008, as amended. The preparation of the consolidated annual financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the reporting date and the reported amounts of revenue and expenses during the reporting period. For a discussion on the Group s critical accounting judgements, see Critical accounting judgements on page 29. Revisions to accounting estimates are recognised in the period in which the estimate 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. The consolidated annual financial statements are presented in South African rand, which is the parent company s functional and presentation currency. The significant accounting policies are consistent in all material respects with those applied in the previous year. Significant accounting policies Accounting convention The consolidated annual financial statements are prepared on a historical cost basis, except for certain financial instruments which are measured at fair value or at amortised cost. Consolidation Basis of consolidation The consolidated annual financial statements incorporate the annual financial statements of Vodacom Group Limited, its subsidiaries, joint venture, associate and special purpose entities up to 31 March Business combinations Acquisitions of subsidiaries are accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred by the Group to the former owners of the acquiree, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the Group s previously held equity interest in the acquiree, if any, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. Where applicable, the consideration transferred includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition-date fair value. Changes in fair value that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Changes in fair value that do not qualify as measurement period adjustments are adjusted prospectively, with the corresponding gain or loss being recognised in profit or loss. Components of non-controlling interests that are current ownership interests and entitle their holders to a proportionate share of the acquiree s net assets in the event of liquidation are measured at the acquisition date at either: The choice of measurement basis is made on an acquisition-by-acquisition basis. All other components of non-controlling interests are measured at their acquisition-date fair values, unless another measurement basis is required by IFRS. The difference between the proceeds and the carrying amount of the net assets and liabilities disposed of, adjusted for any related carrying amount of goodwill, is recognised as the profit or loss on disposal of subsidiaries. The same principle applies to joint ventures. Accounting for subsidiaries A subsidiary is an entity controlled by the Group. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries are included in profit or loss from the effective date of acquisition up to the effective date of disposal. Where necessary, adjustments are made to the financial statements of subsidiaries to align their accounting policies with those of the Group. 18

8 Vodacom Group Limited Integrated report Year ended 31 March 2012 > Consolidated annual 19. Provisions (continued) 19.1 Employee benefits provisions Deferred bonus incentive provision The value of entitlements are determined based upon the audited consolidated annual financial statements of the Group. Since 2009 the Group no longer issues any entitlements and all past entitlements will continue to increase in value, based on defined profit increase, until expiry. The provision represents the present value of the expected future cash outflows of the entitlement value at the reporting dates, less the value at which the entitlements were issued, multiplied by the number of entitlements allocated. The provision is utilised when eligible employees receive the value of vested entitlements. Other employee benefits provision The provision is measured based on contractually agreed terms, which was revised in 2010, and increases as the employee renders the related service. The provision is utilised when eligible employees terminate their services as set out in the agreement. Rm April Interest cost 13 Current service cost Recognised actuarial losses 45 Curtailments 67 Net cost Total benefit payments (28) (41) (38) 31 March Other provisions Other provisions include provisions for asset retirement obligations. In the course of the Group s activities, a number of sites and other assets are utilised which are expected to have costs associated with exiting and ceasing their use. The associated cash outflows are generally expected to occur at the dates of exit of the assets to which they relate, which are long-term and short-term in nature. Rm Cash generated from operations Operating profit Adjusted for: Depreciation and amortisation (Notes 9 and 10) Net loss on disposal of property, plant and equipment and intangible assets (Note 3) Impairment losses (Note 2) Other non-cash flow items Cash flows from operations before working capital changes Increase in trade and other receivables (262) (1 120) (912) Increase in inventory (162) (117) (122) Increase in trade and other payables and provisions Cash generated from operations Business combinations and partial disposal of interests in subsidiaries 21.1 Business combinations Aggregate net cash consideration paid Consideration transferred (including directly attributable costs) (52) Deferred contingent consideration (Note ) (23) 24 (23) (28) Net cash and cash equivalents acquired 4 (23) (24) 60

9 Vodacom Group Limited Integrated report Year ended 31 March 2012 > Consolidated annual 21. Business combinations and partial disposal of interests in subsidiaries (continued) 21.1 Business combinations (continued) Stortech Converged Communications (Pty) Limited Effective 1 October 2011, the Group acquired a 61% interest for a consideration of R AfriConnect Zambia Limited Effective 30 June 2010, the Group acquired a 100% interest in AfriConnect Zambia Limited, an internet service provider company, for a consideration of R52 million. Cash and cash equivalents of R4 million were acquired. The aggregate fair values of the identifiable net assets acquired were determined as R12 million. Goodwill of R36 million relating to this acquisition represents future synergies and was allocated to the Vodacom Business Africa cash-generating unit. The deferred contingent consideration of R23 million was paid during the current year Partial disposal of interests in subsidiaries During the year the Group sold 9.0% (2011: 4.0%) of its stake in VM,SA to the non-controlling parties. Effective 28 June 2010, the Group sold 8.28% of its stake in Vodacom Lesotho (Pty) Limited to the non-controlling party. Rm Total cash consideration Net liabilities disposed Net gain on disposal Cash and cash equivalents Bank and cash balances Bank overdrafts 1 (409) (331) (110) The carrying amount of cash and cash equivalents normally approximates its fair value due to short-term maturity. Included in cash and cash equivalents for 2010 is a restricted amount of R44.0 million, which was not available for use by the Group. Note: 1. Bank overdrafts, excluding those classified as financing activities in the statement of cash flows, are regarded as part of the Group s integral cash management system. Rm Commitments Operating leases (Note 23.1) Transmission and data lines (Note 23.2) Capital expenditure contracted for but not yet incurred (Note 23.3) Capital expenditure approved by the Board but not yet contracted for (Note 23.3) Other (Note 23.4) Operating leases Future minimum lease payments under non-cancellable operating leases comprise: Within one year Between one and five years After five years Operating leases include leases of certain transmission and data lines, offices, distribution outlets, sites, buildings, office equipment and motor vehicles. The remaining lease terms vary between one and 19 years (2011: one and 19 years; 2010: six months and 18 years) with escalation clauses that vary from an annual fixed escalation rate between 2.0% and 12.0% (2011: 2.0% and 12.0%; 2010: 3.5% and 12.0%) per annum or an annual variable consumer price index rate. Various options to renew exist. The total of future minimum sublease payments expected to be received under non-cancellable subleases is R584 million (2011: R326 million; 2010: R267 million). Note: 1. Capital expenditure approved for the 2013 financial year at forecasted exchange rates, limited to R8 863 million (2011: R8 844 million; 2010: R7 375 million), was translated at the closing rates as at the reporting date. 61

10 Notes to the consolidated financial statements continued for the year ended 31 March Summary of significant accounting policies (continued) 2.2 Consolidation Investment in subsidiaries Subsidiaries are all entities (including special-purpose entities) over which the group has the power to govern the financial and operating policies to obtain benefits from the activities of the entity. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases. Investments in subsidiaries are accounted for at cost less impairment losses in the separate financial statements of the company. Business combinations The group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest s proportionate share of the acquiree s net assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the group s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in profit or loss. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated, but are considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been adjusted where necessary, to ensure consistency with the policies adopted by the group. Transactions with non-controlling interests The group treats transactions with non-controlling interests as transactions with equity owners of the group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to noncontrolling interests are also recorded in equity. Common control transactions The group accounts for common control transactions in the consolidated financial statements using the book value (predecessor) basis of accounting. In applying the book value basis, the acquirer in a common control transaction recognises the assets and liabilities acquired using the book values in the financial statements of the relevant entity. Any difference between the consideration paid and the book values of the assets and liabilities acquired is recognised directly in equity. The company also accounts for common control transactions in the separate financial statements using the book value basis of accounting. In applying the book value basis, the acquirer recognises the cost of its investment at the carrying amount of the investment recognised in the separate financial statements of the transferring entity. Any difference between the consideration paid and the cost of investment acquired is recognised directly in equity. Investments in equity-accounted investees Associates are all entities over which the group has significant influence but no control over the financial and operating policies, generally linked to a shareholding of between 20% and 50% of the voting rights. Joint ventures are contractual arrangements whereby two or more parties undertake an economic activity that is subject to joint control. Investments in associates and joint ventures are accounted for at cost less impairment losses in the separate financial statements of the company. These investments are accounted for using the equity method of accounting and are initially recognised at cost in the financial statements of the group. The group s investment in associates and joint ventures includes goodwill (net of any accumulated impairment loss) identified on acquisition. The group s share of its associates and joint ventures postacquisition profits or losses is recognised in profit or loss within share of profit of equity-accounted investees, and its share of post-acquisition movements in other comprehensive income is recognised directly in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the group s share of losses in an associate or joint venture equals or exceeds its interest in the associate or joint venture, including any other unsecured receivables, the group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture. Unrealised gains on transactions between the group and its associates or joint ventures are eliminated to the extent of the group s interest in the associates or joint ventures. Unrealised losses are also eliminated, but are considered an impairment indicator of the asset transferred. Accounting policies of associates or joint ventures have been adjusted where necessary to ensure consistency with the policies adopted by the group. If the financial statements of the associate or joint venture are prepared as of a different date to that of the group, adjustments are made to the financial statements of the associate or joint venture for significant transactions and events that occur between the date of the financial statements of the associate or joint venture and the date of the financial statements of the group to enable the financial statements of the associate or joint venture to be used for the equity accounting of the associate or joint venture. The maximum time period between the date of the financial statements of the associate or joint venture and the date of financial statements of the group is three months. 20 Eskom Holdings SOC Limited Annual Financial Statements 2012

11 Notes to the consolidated financial statements continued for the year ended 31 March Summary of significant accounting policies (continued) 2.6 Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the group s share of the net identifiable assets of the acquired subsidiary/associate/joint venture at the date of acquisition. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates and joint ventures is included in investments in equity-accounted investees and is tested for impairment as part of the overall balance. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The group allocates goodwill to each business segment in each country in which it operates. Licences Licences are shown at historical cost. Licences have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method over a period of two to five years in order to allocate the cost of licences over their estimated useful life. Computer software Acquired computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is calculated using the straight-line method over a period of two to five years in order to allocate the cost of computer software over their estimated useful life. If software is integral to the functionality of related equipment, then it is capitalised as part of the equipment. Costs that are directly associated with the development of identifiable and unique software products controlled by the group, and that will probably generate economic benefits exceeding costs beyond one year are recognised as intangible assets and amortised as above. Costs include employee costs incurred as a result of developing software, borrowing costs if relevant (refer to note 2.8) and an appropriate portion of relevant overheads. Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Rights Rights consist mainly of servitudes and rights of way under power lines. Rights are not amortised as they have an indefinite useful life. A servitude right is granted to Eskom for an indefinite period. The life of the servitude will remain in force as long as the transmission or distribution line is used to transmit electricity. A servitude will only become impaired if the line to which the servitude is linked is derecognised. In practice, a derecognised line will be refurbished or replaced by a new line. The likelihood of the impairment of a servitude right is remote. Concession assets Concession assets consists of rights to charge for the usage of the infrastructure under service concession arrangements (refer to note 20). Concession assets are capitalised on the basis of the cost of capital expenditure incurred in respect of service concession arrangements (which is the fair value at initial recognition), including borrowing costs on qualifying capital expenditures. Subsequent to initial recognition, the concession assets are measured at cost less accumulated amortisation and impairment losses. Concession assets are amortised over their estimated useful life, which is the concession period during which they are available for use. Intangible assets arising from a service concession arrangement are included within intangible assets under concession assets. Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when all of the following criteria are fulfilled: it is technically feasible to complete the intangible asset so that it will be available for use or sale management intends to complete the intangible asset and use or sell it there is an ability to use or sell the intangible asset it can be demonstrated how the intangible asset will generate probable future economic benefits adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available the expenditure attributable to the intangible asset during its development can be measured reliably Research and other development expenditure that do not meet these criteria is recognised in profit or loss within other operating expenses. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis over its useful life. 2.7 Impairment of non-financial assets The carrying amounts of the group s non-financial assets, other than inventories, deferred tax assets and tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. Assets that have an indefinite useful life, for example land, are not subject to amortisation or depreciation and are tested annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cashgenerating units). Non-financial assets other than goodwill that were subject to impairment are reviewed for possible reversal of the impairment at each reporting date. Impairment (loss)/reversal is recognised in profit or loss within net impairment (loss)/reversal. 22 Eskom Holdings SOC Limited Annual Financial Statements 2012

12 The cash flows of a foreign subsidiary are translated at the exchange rates between the functional currency and the foreign currency at the average rate of the year or period. attributable to the business combination are expensed as incurred, except the costs to issue debt which are amortised as part of the effective interest and costs to issue equity which are included in equity Consolidation Basis of consolidation The consolidated annual financial statements incorporate the annual financial statements of the company and all entities, including special purpose entities, which are controlled by the company. Contingent consideration is included in the cost of the combination at fair value as at the date of acquisition. Subsequent changes to the assets, liability or equity which arise as a result of the contingent consideration are not affected against goodwill, unless they are valid measurement period adjustments. Control exists when the company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries are included in the consolidated annual financial statements from the effective date of acquisition to the effective date of disposal. The acquiree s identifiable assets, liabilities and contingent liabilities which meet the recognition conditions of IFRS 3 Business Combinations are recognised at their fair values at acquisition date, except for non-current assets (or disposal group) that are classified as held-for-sale in accordance with IFRS 5 Non-current Assets Held-for-sale and Discontinued Operations, which are recognised at fair value less costs to sell. Adjustments are made when necessary to the annual financial statements of subsidiaries to bring their accounting policies in line with those of the Group. Contingent liabilities are only included in the identifiable assets and liabilities of the acquiree where there is a present obligation at acquisition date. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Non-controlling interests in the net assets of consolidated subsidiaries are identified and recognised separately from the Group s interest therein, and are recognised within equity. Losses of subsidiaries attributable to non-controlling interests are allocated to the non-controlling interest even if this results in a debit balance being recognised for non-controlling interest. Transactions which result in changes in ownership levels, where the Group has control of the subsidiary both before and after the transaction are regarded as equity transactions and are recognised directly in the statement of changes in equity. The difference between the fair value of consideration paid or received and the movement in non-controlling interest for such transactions is recognised in equity attributable to the owners of the parent. Where a subsidiary is disposed of and a non-controlling shareholding is retained, the remaining investment is measured to fair value with the adjustment to fair value recognised in profit or loss as part of the gain or loss on disposal of the controlling interest. Business combinations The Group accounts for business combinations using the acquisition method of accounting. The cost of the business combination is measured as the aggregate of the fair values of assets given, liabilities incurred or assumed and equity instruments issued. Costs directly On acquisition, the Group assesses the classification of the acquiree s assets and liabilities and reclassifies them where the classification is inappropriate for Group purposes. This excludes lease agreements and insurance contracts, whose classification remains as per their inception date. Non-controlling interest arising from a business combination is measured either at its share of the fair value of the assets and liabilities of the acquiree or at fair value. The treatment is not an accounting policy choice but is selected for each individual business combination, and disclosed in notes 21.4 and 21.5 for business combinations. In cases where the Group held a non-controlling shareholding in the acquiree prior to obtaining control, that interest is measured to fair value as at acquisition date. The measurement to fair value is included in profit or loss for the year. Where the existing shareholding was classified as an available-for-sale financial asset, the cumulative fair value adjustments recognised previously to other comprehensive income and accumulated in equity are recognised in profit or loss as a reclassification adjustment. Goodwill is determined as the consideration paid, plus the fair value of any shareholding held prior to obtaining control, plus noncontrolling interest and less the fair value of the identifiable assets and liabilities of the acquiree. Goodwill is not amortised but is tested on an annual basis for impairment. If goodwill is assessed to be impaired, that impairment is not subsequently reversed. 49 Integrated Annual Report 2012