17.1.1 DIVIDEND INCOME

Dividends receivable are recognised when the right to receive payment is established.

17.1.2 SUBSIDIARIES

The results of subsidiaries are included for the duration of the period in which the group exercises control over the subsidiary. All intercompany transactions and resultant profits or losses between group companies are eliminated on consolidation. Where necessary, accounting policies for subsidiaries are changed to ensure consistency with the policies adopted by the group. If it is not practical to change the policies, the appropriate adjustments are made on consolidation to ensure consistency within the group.

The results of the structured entities that, in substance, are controlled by the group, are consolidated.

The company carries its investments in subsidiaries at cost, including transaction costs and initial fair value of contingent consideration arising on acquisition date, less accumulated impairment losses. Subsequent fair value remeasurements of the contingent consideration are recognised in profit or loss.

Business combinations are accounted for using the acquisition method as at the acquisition date, that is, when control is transferred to Exxaro. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, Exxaro takes into consideration potential voting rights that are currently exercisable. The group also assesses existence of control where it does not have more than 50% of the voting power, but is able to govern the financial and operating policies by virtue of de facto control.

De facto control may arise in circumstances where the size of the group’s voting rights relative to the size and dispersion of holdings of other shareholders give the group the power to govern the financial and operating activities.

17.1.2.1 Changes in ownership interest in subsidiaries without change in control

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions, that is, as transactions with the owners in their capacity as owners. The difference between the fair value of 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 the acquisition of non-controlling interests are also recorded in equity.

17.1.2.2 Disposal of subsidiaries

When the group ceases to have control, any retained interest in the entity is remeasured to its fair value at the date when control is lost, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequent accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the group had directly disposed of the related assets and liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.

17.1.2.3 Foreign operations

The results and financial position of all the group entities (none of which have the currency of a hyper-inflationary economy at or for the year ended 31 December 2018 and 2017) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

• Assets and liabilities at rates of exchange ruling at the reporting date
• Equity items are translated at historical rates
• Income, expenditure and cash flow items at weighted average rates
• Goodwill and fair value adjustments arising on acquisition at rates of exchange ruling at the reporting date.

Exchange differences on translation are accounted for in other comprehensive income. These differences will be recognised in profit or loss upon realisation of the underlying operation.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations (ie the reporting entity’s interest in the net assets of that operation), and of borrowing and other currency instruments designated as hedges of such instruments, are taken to other comprehensive income. When a foreign operation is sold, exchange differences that were recorded in other comprehensive income are recognised in profit or loss.

17.1.3 INVESTMENTS IN SHARE-BASED PAYMENTS

Exxaro has an agreement with its subsidiary companies to charge the subsidiaries for the equity compensation share schemes (Refer Chapter 14) granted to the subsidiaries’ employees.

The movement in equity in the company’s financial statements relating to the recharge of the share-based payments of subsidiaries is accounted for against investments in subsidiaries and is eliminated on consolidation for group reporting purposes.

17.2.1 CONTROL ASSESSMENT FOR CONSOLIDATION OF SUBSIDIARIES

In applying IFRS 10 Consolidated Financial Statements management has applied judgement in assessing whether Exxaro has control over certain entities where the percentage shareholding does not provide control. Specifically:

(a) Eyesizwe

Exxaro has control over Eyesizwe even though Exxaro only holds a 24.9% equity interest in Eyesizwe. Eyesizwe was created and designed for the sole purpose of providing Exxaro with BEE credentials and as a structure to hold Exxaro shares. The implementation of the Replacement BEE Transaction will protect the stability of Exxaro’s operations reinforcing the sustainability of relationships with key stakeholders, equip Exxaro for growth by positioning Exxaro with market leading empowerment credentials in the South African mining sector and create long-term value for shareholders.

Exxaro is able to direct the strategic direction of Eyesizwe and as per the transaction agreements, Eyesizwe’s MoI may not be amended or replaced without Exxaro’s prior written consent. All these points indicate that Exxaro has been involved from the inception of the Replacement BEE Transaction, to ensure that the design and operation of Eyesizwe achieves the purpose for which it was created. Eyesizwe can also not dispose of Exxaro shares without the prior consent of Exxaro. Exxaro has significant exposure to the variable returns of Eyesizwe, through the creation and maintenance of the BEE credentials during the lock-in period as well as through the equity investment held by Exxaro in Eyesizwe. All these factors have been considered in determining that even though Exxaro does not have majority voting rights in Eyesizwe, it still has control over Eyesizwe and consolidates the results of Eyesizwe in the group results of Exxaro.

(b) Mmakau Coal Proprietary Limited

The group has control over Mmakau Coal Mines Proprietary Limited even though the group’s equity interest is only 49%. The group has provided all funding and carries the entire operational risk. Mmakau Mining Proprietary Limited holds the other 51% equity interest and is not exposed to any downside risk through its equity investment.

(c) Tumelo Coal Mines Proprietary Limited

The group has control over Tumelo Coal Mines Proprietary Limited, even though the group’s equity interest is only 49%, as the group performs the management function.

TERMS AND CONDITIONS OF TRANSACTIONS WITH SUBSIDIARIES

Back-to-back loans receivable

The back-to-back loans have similar terms as agreed with external lenders except for interest, which is charged based on JIBAR plus a margin. Refer note 12.1.4 for detailed terms and conditions of the external loan facility.

The interest rates and margin achieved are summarised below:

BEE loan receivable

The loan is unsecured, bears interest at prime rate (10.25%) and has been repaid in full during 2018.

Treasury facilities

Treasury facilities are unsecured, have no repayment terms and are repayable on demand. Interest is charged at money market rates.

Non-interest-bearing loans

The non-interest-bearing loans are unsecured, have no repayment terms and are repayable on demand.

Revenue from subsidiaries

Certain subsidiaries are charged corporate service fees which are repayable within 30 days.

Insurance premiums

Insurance premiums are payable annually in advance.

The principal place of business of all subsidiaries with non-controlling interests is in Mpumalanga, South Africa. No dividends were paid during 2018 nor 2017.