Exxaro

This note explains the items which were reclassified as well as the impact of the adoption of IFRS 9 and IFRS 15 on the condensed annual financial statements. This note also discloses the new accounting policies that have been applied from 1 January 2018, where they are different to those applied in prior periods.

As part of the implementation of IFRS 9 a detailed analysis was performed on the classification of items in the statement of financial position. It was concluded that certain items needed to be reclassified in the prior year financial statements, as these reclassifications provide more relevant information on the nature of these assets and liabilities and results in more appropriate classifications. The reclassified items are discussed in detail below the table. Although the reclassifications to cash and cash equivalents, lease receivables, trade and other payables as well as interest-bearing borrowings are corrections to the incorrect classification applied previously it was not considered material and therefore the prior year financial statements have not been restated but only represented.

Prior year financial statements did not have to be restated as a result of the changes in the group’s accounting policies due to the adoption of IFRS 9 and IFRS 15. As explained in note 4.2, IFRS 9 was adopted without restating comparative information. The adjustments arising from the new impairment rules are therefore not reflected in a restated statement of financial position as at 31 December 2017, but are recognised in the opening statement of financial position on 1 January 2018. As explained in note 4.3 below, IFRS 15 was also adopted without restating comparative information.

The following table shows the reclassifications and adjustments recognised for each individual line item as per the statement of financial position. The reclassifications and adjustments are explained in more detail by standard below.

IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) for annual periods beginning on or after 1 January 2018. IFRS 9 brings together all aspects of accounting for financial instruments that relate to the recognition, classification and measurement, derecognition, impairment and hedge accounting.

The adoption of IFRS 9 from 1 January 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. The new accounting policies are set out in note 4.2.3 below. Comparative information has not been restated in accordance with the transitional requirements of IFRS 9 which requires comparative information not to be restated (with an exception where it is possible to restate without the use of hindsight) but for disclosures to be made concerning the reclassifications and measurements as set out below.

The total impact on the group’s retained earnings as at 1 January 2018 is as follows:

IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. However, IFRS 9 eliminates the previous IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale financial assets.

The accounting for the group’s financial liabilities remains largely the same as it was under IAS 39. Similar to the requirements of IAS 39, IFRS 9 requires contingent consideration liabilities to be treated as financial instruments measured at fair value, with the changes in fair value recognised in profit or loss.

Under IFRS 9, on initial recognition, a financial asset is classified as measured at:

• Amortised cost;
• Fair value through other comprehensive income (FVOCI) debt investment;
• FVOCI equity investment; or
• Fair value through profit or loss (FVPL).

The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. Derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated. Instead, the hybrid financial instrument as a whole is assessed for classification.

On 1 January 2018 (the date of initial application of IFRS 9), management assessed which business model applied to the financial assets held by the group and classified its financial instruments into the appropriate IFRS 9 categories. In addition, management assessed whether contractual cash flows on debt instruments were solely comprised of principal and interest based on the facts and circumstances at the initial recognition of the assets. The main effects resulting from this reclassification are as follows:

The impact of the changes on the group’s equity is as follows:

(a) Reclassify non-trading equities from available-for-sale to FVOCI

The group elected to present in OCI changes in the fair value of the Chifeng equity investment previously classified as available-for-sale, because the investment is not expected to be sold in the short to medium term. As a result, an asset with a fair value of R152 million was reclassified from available-for-sale financial assets to financial assets at FVOCI and fair value losses of R74 million were reclassified from the available-for-sale revaluation reserve to the financial asset FVOCI revaluation reserve on 1 January 2018.

(b) Reclassify held-for-trading and designated FVPL financial assets to FVPL

These reclassifications have no impact on the measurement categories.

(c) Reclassify loans and receivables financial assets to amortised cost

These reclassifications have no impact on the measurement categories.

(d) Reclassify loans and receivables at amortised cost to a financial asset measured at FVPL

An other receivable with a gross amount of R70 million was reclassified to a financial asset at FVPL as a result of the contractual cash flows not meeting the solely payments of principal and interest (SPPI) criteria. In addition, the impairment allowance of R70 million was also reclassified. The fair value of the financial asset was determined to be nil.

(e) Reclassify held-for-trading and designated FVPL financial liabilities to FVPL

These reclassifications have no impact on the measurement categories.

(f) Reclassify financial liabilities to amortised cost

These reclassifications have no impact on the measurement categories.

IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ (ECL) model. The new impairment model applies to financial assets measured at amortised cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments. Under IFRS 9, credit losses (impairments) are recognised earlier than under IAS 39.

Under IFRS 9, expected credit loss allowances are measured on either of the following basis:

• 12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and
• lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument.

The group has four types of financial assets that are subject to IFRS 9’s new ECL model, namely:

• Trade receivables for the sale of goods and rendering of services;
• Other receivables;
• Loans to joint ventures and associates; and
• Financial assets carried at amortised cost.

The group was required to revise its impairment methodology under IFRS 9 for each of these classes of assets. The impact of the change in impairment methodology on the group’s retained earnings and equity is disclosed in the first table of note 4.2 above.

While loans to joint ventures and associates as well as cash and cash equivalents are subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.

(a) Trade receivables

The group applies the IFRS 9 simplified approach to measuring ECLs which uses a lifetime expected credit loss allowance for all trade receivables. To measure the ECLs, trade receivables have been grouped based on shared credit risk characteristics (corporate entities, small medium enterprises and public sector entities) and the days past due to assess significant increase in credit risk.

The impairment allowances as at 1 January 2018 for trade receivables are as follows:

The impairment allowances for trade receivables as at 31 December 2017 reconcile to the opening expected credit loss allowances for trade receivables on 1 January 2018 as follows:

The expected credit loss allowances increased by a further R13 million to R81 million for trade receivables during the year ended 31 December 2018. The increase would have been R1 million lower under the incurred loss model of IAS 39.

Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the group, and a failure to make contractual payments for a period of greater than 120 days past due.

(b) Other receivables and other financial assets at amortised cost

The group’s other receivables and other financial assets at amortised cost are considered to have low credit risk, and the expected credit loss allowance recognised during the period was therefore limited to 12 months’ expected losses. These instruments are considered to be low credit risk when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term. Applying the expected credit risk model resulted in the recognition of an expected credit loss allowance of R8 million on 1 January 2018 (previous impairment allowance was R70 million which was reclassified on 1 January 2018). The expected credit loss allowances increased by a further R51 million to R59 million for other receivables and other financial assets at amortised cost during the year ended 31 December 2018.

(a) Financial assets

(a.i) Classification

From 1 January 2018, the group classifies its financial assets in the following measurement categories:

• those measured subsequently at fair value (either through OCI, or through profit or loss); and
• those measured at amortised cost.

The classification depends on the group’s business model for managing the financial assets and the contractual terms of the cash flows.

For assets measured at fair value, gains and losses will either be recorded in profit or loss or OCI. For investments in equity instruments that are not held for trading, this will depend on whether the group has made an irrevocable election at the time of initial recognition to account for the equity investment at FVOCI.

The group reclassifies debt investments when, and only when, its business model for managing those assets changes.

(a.ii) Measurement

At initial recognition, the group measures a financial asset at its fair value plus, in the case of a financial asset not at FVPL, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are SPPI.

Debt instruments

Subsequent measurement of debt instruments depends on the group’s business model for managing the asset and the cash flow characteristics of the asset. Currently there are two measurement categories into which the group classifies its debt instruments, as the group does not hold any debt instruments classified as FVOCI, as summarised in the table below.

Equity instruments

Equity investments are subsequently measured at fair value. Where management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognised in profit or loss as income from financial assets when the group’s right to receive payments is established.

Changes in the fair value of financial assets at FVPL are recognised in operating expenses in the statement of comprehensive income as applicable. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.

(a.iii) Impairment

From 1 January 2018, the group assesses on a forward looking basis the ECLs associated with its debt instruments carried at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk.

ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the group in accordance with the contract and the cash flows that the group expects to receive). ECLs are discounted at the effective interest rate of the financial asset.

For trade receivables, the group applies the simplified approach permitted by IFRS 9, which requires lifetime ECLs to be recognised from initial recognition of the receivables. Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the group, and a failure to make contractual payments for a period of greater than 120 days past due.

For other financial assets measured at amortised cost, the ECL is based on the 12-month expected credit loss allowance. The 12-month expected credit loss allowance is the portion of lifetime expected credit loss allowances that result from default events on a financial instrument that are possible within 12 months after the reporting date. However, when there has been a significant increase in credit risk since origination, the ECL will be based on the lifetime expected credit loss allowances.

The group assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due.

The group considers a financial asset to be in default when contractual payments are 90 days past due. However, in certain cases, the group may also consider a financial asset to be in default when internal or external information indicates that the group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the group.

(b) Loan commitments issued by the group

Undrawn loan commitments are commitments under which, over the duration of the commitment, the group is required to provide a loan with pre-specified terms to the counterparty. These contracts are in the scope of the ECL requirements of IFRS 9.

When estimating 12-month or lifetime ECLs for undrawn loan commitments, the group estimates the expected portion of the loan commitment that will be drawn down over 12 months or its expected life respectively. The ECL is then based on the present value of the expected shortfalls in cash flows if the loan is drawn down, based on a probability-weighting. The cash shortfalls include the realisation of any collateral. The expected cash shortfalls are discounted at an approximation to the expected effective interest rate on the loan.

Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below.

• The group has taken an exemption not to restate comparative information for prior periods with respect to classification and measurement (including impairment) requirements. Therefore, comparative periods have not been restated. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 January 2018. Accordingly, the information presented for 2017 does not reflect the requirements of IFRS 9 but rather those of IAS 39.
• The following assessments have been made on the basis of the facts and circumstances that existed at the date of initial application:
  • The determination of the business model within which a financial asset is held
  • The designation and revocation of previous designations of certain financial assets and financial liabilities as measured at FVPL
  • The designation of certain investments in equity instruments not held for trading as at FVOCI
• If an investment in a debt security had low credit risk at the date of initial application of IFRS 9, then the group has assumed that the credit risk on the asset had not increased significantly since its initial recognition.

The revenue accounting policy has changed with effect from 1 January 2018 as a result of the group adopting IFRS 15.

IFRS 15 supersedes IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations for annual periods beginning on or after 1 January 2018. IFRS 15 applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised, providing additional guidance in many areas not covered in detail under the previous revenue standards and interpretations. The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying the framework to the contracts with customers. The standard also specifies the accounting treatment for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. IFRS 15 further includes extensive new disclosure requirements.

Refer note 4.3.3 for the group’s revised revenue accounting policy and note 7 for the disaggregated revenue disclosure required by IFRS 15.

In accordance with the transition provisions of IFRS 15, the group has adopted the standard applying the cumulative effect method. In terms of this method the group:

Accordingly the comparative information presented for 2017 has not been restated, but presented as previously reported applying the previous revenue standards and interpretations. The cumulative effect of the retrospective application on the group’s retained earnings as at 1 January 2018 is as follows:

The following tables present a comparison of the financial results as reported under IFRS 15 to what the financial results would have been in terms of IAS 18.

Impact on the reviewed condensed group statement of comprehensive income

Impact on the reviewed condensed group statement of financial position

The standard terms and conditions in the group’s contracts with customers result in the same revenue recognition under IFRS 15, as compared to IAS 18, except for the following specific contractual arrangements that had an impact on initial application:

(a) Contract modification consideration

A contract with a customer for the sale of goods has two distinct phases of delivery of the underlying goods. The contract was modified to include additional consideration over a period of seven years (referred to as the contract modification consideration).

Under IAS 18, the contract modification consideration was determined as a standalone revenue arrangement and would have been recognised as revenue over the seven-year period. Under IFRS 15, the contract modification consideration is assessed as a pricing adjustment that relates only to the goods delivered under the first phase of the contract, which was concluded at the end of the 2017 financial year, and is therefore required to be allocated to the goods delivered under this phase. Accordingly, the revenue recognition of the contract modification consideration is recognised earlier under IFRS 15 than IAS 18. This adjustment has been made on the cumulative effect basis, with the adoption of IFRS 15, to opening retained earnings as at 1 January 2018.

(b) Stock yard management services

On certain contracts, the group was compensated in the form of a cost recovery for the rendering of stock yard management services.

Under IAS 18, up to 31 December 2017, these cost recoveries were accounted for in operating expenses as a cost recovery, as it was not seen as the main operation or revenue stream of the group. Under IFRS 15, however, the rendering of these services is seen as a separate performance obligation and forms part of the revenue of the group. Accordingly the income from the rendering of stock yard management services is presented as revenue separately from the corresponding cost. There is no impact on the profit or loss of the group as the accounting is similar to a reclassification.

The group derives revenue from contracts with customers for the supply of goods and rendering of services.

Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected where the group acts as an agent. If the group is an agent, then revenue is recognised on a net basis — corresponding to any fee or commission to which the group expects to be entitled. The group recognises revenue when it transfers control of the goods or services to a customer.

The group has applied the practical expedient in IFRS 15.63 (which states that an entity is not required to reflect the time value of money in its estimate of the transaction price if it expects at contract inception that the period between customer payment and the transfer of goods or services will not exceed 12 months). Generally for contracts in the group, the period of time between delivery of goods or services and receipt of payment ranges between two weeks to 60 days which is less than 12 months. Accordingly, the group does not adjust the promised amount of consideration for the effects of a significant financing component. For the group, the total consideration in the service contracts will be allocated to all services per the contract based on their standalone selling prices. The standalone selling prices will be determined based on the listed prices at which the group sells the services in separate transactions.

Nature of goods and services

Below is a summary of the different types of revenue derived by the group depicting the standard terms and performance obligations for each type: