NOTES TO THE SUMMARY FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 June 2020

The summary consolidated financial statements are prepared in accordance with the requirements of the JSE Limited (JSE) for summary financial statements, and the requirements of the Companies Act applicable to summary financial statements. The JSE requires summary financial statements to be prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (IFRS) and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council and to also, as a minimum, contain the information required by IAS 34: Interim Financial Reporting.

The accounting policies applied in the preparation of the consolidated financial statements from which the summary consolidated financial statements were derived are in terms of IFRS and are consistent with those accounting policies applied in the preparation of the previous consolidated Annual Financial Statements, with the exception of the implementation of IFRS 16: Leases. Refer to “Change in accounting policies” for further detail on the implementation of this standard. During the year under review various other interpretations and amendments became effective, but their implementation had no impact on the results of either the current or prior years. The financial statements have been prepared under the supervision of the Chief Financial Officer, Neville Williams CA(SA).

The summary consolidated financial statements do not contain all the information and disclosures required in the consolidated financial statements. The summary consolidated financial statements have been extracted from the audited consolidated financial statements upon which PricewaterhouseCoopers Inc. has issued an unqualified report. The audited consolidated financial statements and the unqualified audit report are available for inspection at the registered office of the Company.

The Group adopted IFRS 16: Leases retrospectively from 1 July 2019, but has not restated comparatives for the 30 June 2019 reporting period as permitted under the specific transition provisions in the standard. The reclassifications and adjustments arising from the new leasing rules are therefore recognised in the opening statement of financial position on 1 July 2019.

On adoption of , the Group recognised lease liabilities in relation to leases that had previously been classified as operating leases under the principles of IAS 17: Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at 1 July 2019. The weighted average incremental borrowing rates applied to the lease liabilities on 1 July 2019 were as follows for each major subsidiary:

Under IAS 17, operating lease payments were expensed on a straight-line basis. Under IFRS 16, lease liabilities with corresponding right-of-use assets are recognised. Finance charges are accrued on the lease liabilities and the right-of-use assets are depreciated over their useful lives. Lease repayments are accounted for against the lease liabilities.

A number of transition options are available to lessees under IFRS 16. The Group applied the modified retrospective approach where two options are available on a lease-by-lease basis:

• The lease liability is measured at the present value of the remaining lease payments over the period of the lease at the incremental borrowing rate measured at 1 July 2019. The right-of-use asset is measured retrospectively as if IFRS 16 had always been applied with an adjustment to retained earnings.
• The lease liability is measured at the present value of the remaining lease payments over the period of the lease at the incremental borrowing rate measured at 1 July 2019. The right-of-use asset is measured at an amount equal to the lease liability, adjusted for prepayments.

As allowed under IFRS 16, the right-of-use assets were determined to be equal to their respective lease liabilities.

In applying IFRS 16 for the first time, the Group has used the following practical expedients as permitted by the standard:

• Applying a single discount rate to a portfolio of leases with reasonably similar characteristics;
• Accounting for operating leases with a remaining lease term of less than 12 months at 1 July 2019 as short-term leases;
• Excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application; and
• Using hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

Significant judgements:

• The most significant judgements required for the implementation of IFRS 16 relate to variable rental payments on RCL Foods Limited’s (RCL Foods) contract grower property and equipment, solar panels and sugar cane farms, as well as accounting for leases with extensions and termination options by that subsidiary. These assessments will be reviewed if significant events or changes in circumstances occur. During the current financial period there were no revisions of lease terms resulting from changes in management’s assessment of extension or termination options.

The change in accounting policy affected the following items on the statement of financial position on 1 July 2019:

The main contributors to Remgro’s adoption of IFRS 16 were RCL Foods and Distell Group Holdings Limited (Distell).

The Group’s equity accounted investments also implemented IFRS 16 on the same basis as stated above. The impact of their adoption of IFRS 16 on the statement of financial position on 1 July 2019 was as follows:

As a result of the unbundling of Remgro’s 28.2% interest in RMB Holdings Limited (RMH) (RMH Unbundling), earnings and headline earnings measures are presented for continuing operations and discontinued operations. The investment in RMH is treated as a discontinued operation and, accordingly, discontinued operations include the equity accounted income of RMH for both financial years presented, as well as the profit realised on the RMH Unbundling. For the year under review the investment in RMH was equity accounted for the nine months to 31 March 2020 (2019: twelve months to 30 June 2019). Discontinued operations for the prior year also includes the profit realised on the disposal of Unilever South Africa Holdings Proprietary Limited (Unilever).

It should also be noted that with effect from 8 June 2020, Remgro ceased to have significant influence over FirstRand Limited (FirstRand), due to among others the RMH Unbundling, and therefore the investment was reclassified from an equity accounted investment to an investment at fair value through other comprehensive income (FirstRand Reclassification). For the year under review the investment in FirstRand was equity accounted until 8 June 2020. In future only dividend income will be accounted for FirstRand in the income statement.

During the year under review the platforms under which the results of investee companies are being reported, were changed. Previously RMH and FirstRand were classified under Banking and Rand Merchant Investment Holdings Limited (RMI) was classified under Insurance. As a result of the RMH Unbundling, these investee companies are included under the Financial services platform. Comparative figures have been presented accordingly.

At 30 June 2020, Remgro recognised an impairment amounting to R1 809 million relating to the goodwill allocated to Distell with the business combination of the Company during May 2018. The Covid-19 national lockdown and accompanying ban on the sale of alcohol had a significant impact on Distell’s business. Accordingly, the cash flows forecast in the discounted cash flow model used to determine Distell’s value in use was diminished. This resulted in a lower recoverable amount. Revenue and cash flow projections for a five-year period were estimated and reflect management’s best view of future earnings. A discount rate of 11.4% and a terminal growth rate of 4.5% were used to determine the value in use.

RCL Foods recognised an impairment on goodwill (R598 million) relating to its Vector (R287 million), Beverages (R123 million), Pies (R114 million) and Speciality (R74 million) business units, including indefinite life intangible assets of R315 million in the Milling business unit. The impairments were due to the negative impact of the Covid-19 pandemic on the global and South African economy. The recoverable amounts of the RCL Foods’ cash-generating units (CGU) were based on their value in use.

Remgro recognised no additional impairment on the goodwill allocated to Siqalo Foods Proprietary Limited (Siqalo Foods) (2019: R888 million). The recoverable amount of the investment in Siqalo Foods, that exceeds its carrying value, is its value in use and was determined using the discounted cash flow method. Cash flow projections for a five-year period were estimated and reflect management’s best view of future earnings. A discount rate of 12.1% and a terminal growth rate of 5.5% were used.

Reversal of impairments/(impairments) were recognised for the following investments:

The listed market value of the investment in Mediclinic International plc (Mediclinic) was R18 769 million on 30 June 2020 (2019: R17 891 million), which is significantly lower than the carrying value of R27 443 million (2019: R27 917 million) before impairment. Mediclinic reported losses for its year ended 31 March 2020. Accordingly, management assessed for impairment by means of a value in use calculation. The value in use calculation is based on a discounted cash flow model. The calculation requires the use of estimates in respect of cash flows, growth and discount rates and it assumes a stable regulatory environment. These estimates are based on publicly available information such as analysts’ consensus forecast and guidance provided by Mediclinic in its annual results. Given that Mediclinic, in terms of London Stock Exchange listing requirements and its Disclosure Guidance and Transparency Rules, must monitor such publicly available information for reasonability against its internal budgets and forecast and publish guidance should there be a significant deviance, management has comfort that the estimates used in the discounted cash flow calculation are reasonable.

Cash flow projections for a five-year period were estimated and reflect management’s best view of future earnings. The discount and terminal growth rates used for the business segments are as follows:

Any increase in the discount rate or decreases in the short-term cash flow projections or terminal growth rate could give rise to further impairment charges in future. The value in use of the investment is R28 776 million on 30 June 2020 and, as a result, no further impairment was recognised

The following methods and assumptions are used to determine the fair value of each class of financial instruments:

• Financial instruments at fair value and investment in money market funds: Fair value is based on quoted market prices or, in the case of unlisted instruments, appropriate valuation methodologies, being discounted cash flow, liquidation valuation or actual net asset value of the investment.
• Derivative instruments: The fair values of derivative instruments, which are included in financial instruments at FVPL, are determined by using appropriate valuation methodologies and mark-to-market valuations.

Financial instruments measured at fair value are disclosed by level of the following fair value hierarchy:

Level 3 financial assets consist mainly of investments in the Milestone China entities (Milestone) and the Pembani Remgro Infrastructure Fund (PRIF) amounting to R1 299 million and R341 million, respectively. These investments are all valued based on the fair value of each investment’s underlying assets, which are valued using a variety of valuation methodologies. Listed entities are valued at the last quoted share price on the reporting date, whereas unlisted entities’ valuation methods include discounted cash flow valuations, appropriate earnings and revenue multiples.

Milestone’s fair value consists of listed investments (13%), cash and cash equivalents (2%), and unlisted investments (85%). Unlisted investments included at transaction prices in Milestone’s fair value amounted to R988 million, while its remaining three unlisted investments were valued at R117 million. PRIF’s main assets are the investments in ETG Group, Octotel, RSAWeb, Lumos Global, Solar Saver, GPR Leasing and Icolo. ETG Group was valued using a market based approach, specifically the comparable company method (Enterprise value/EBITDA), while the other investments were valued using the discounted cash flow method.

Changes in the valuation assumptions of the above unlisted investments will not have a significant impact on Remgro’s financial statements as the underlying assets of the funds in which Remgro made its investments are widely spread.

On 19 November 2019, Remgro announced its intention to pursue the distribution to shareholders, in full or in part, of Remgro’s exposure to FirstRand and RMH. In parallel with this, RMH announced that it had made the strategic decision to restructure the RMH portfolio of assets and liabilities, which would include the distribution of its shareholding in FirstRand to its shareholders (FirstRand Unbundling).

However, on 31 March 2020 Remgro announced that it will proceed with the full distribution of its 28.2% interest in RMH (RMH Unbundling) and during April 2020 a detailed terms announcement was distributed to shareholders. Remgro’s investment in RMH was previously classified as an associate and accounted for using the equity method. With effect from 31 March 2020 the investment met the criteria to be classified as a disposal group under IFRS 5 and was classified as a noncurrent asset held for distribution. On 8 June 2020 Remgro distributed 397 447 747 ordinary shares in RMH to shareholders in the ratio of 0.69939 RMH ordinary shares for every 1 Remgro share held. The market value of the interim dividend in specie amounted to R23 855 million and an accounting profit of R7 360 million was realised on the distribution.

On 31 March 2020 Remgro also announced that it will retain its 3.9% direct interest in FirstRand (being 219 828 140 FirstRand ordinary shares). Remgro’s investment in FirstRand was previously classified as an associate and accounted for using the equity method. With effect from 8 June 2020 Remgro ceased to have significant influence over FirstRand, due to among others the RMH Unbundling, and the investment was classified as a financial asset at fair value through other comprehensive income. In future only dividend income will be accounted for FirstRand in the income statement. The market value of the investment on that date amounted to R9 927 million and an accounting profit of R4 228 million was realised on the reclassification of the investment.

During the 2019 financial year Remgro advanced a loan amounting to R100 million to CIVH and earned underwriting fees of R58 million on a CIVH rights issue. As previously reported, the loan and outstanding amount of the underwriting fee would be converted to CIVH shares. On 31 March 2020 Remgro invested a further R167 million in CIVH in exchange for the loan and outstanding underwriting fee, which marginally increased Remgro’s interest in CIVH to 54.7% (2019: 54.4%).

During June 2020 Remgro acquired a further 10 573 857 RCL Foods shares for a total amount of R100 million. At 30 June 2020 Remgro’s effective interest in RCL Foods was 77.1% (2019: 77.5%).

During the year under review Invenfin (a wholly owned subsidiary of Remgro) invested a further R103 million in Bos Brands Proprietary Limited.

For other related party transactions refer to note 7 and 12.

On 12 July 2020 the South African government announced new measures to curb the spread of Covid-19. These measures included a ban on the sale of alcoholic beverages, which was lifted again from 18 August 2020 when Distell was allowed to trade again. Distell was still allowed to manufacture products in South Africa during the ban on the sale of alcohol and to continue with its normal export activities. Other major territories in which Distell operates have not been impacted to this extent and was able to trade mostly normally in line with general economic constraints in the various territories. Distell evaluated the adverse consequences of the alcohol ban on its liquidity forecast and concluded that it remains a going concern.

Other than the above-mentioned events, there were no other significant events subsequent to 30 June 2020.