Notes to the condensed consolidated financial statements
for the year ended 31 July 2019
1. REPORTING ENTITY
EOH Holdings Limited (‘EOH’ or the ‘Company’) is a holding company domiciled in South Africa that is listed on the JSE Limited under the category Technology: Software and Computer Services. EOH is one of the largest Information and Communications Technology (‘ICT’) services providers in South Africa and is committed to providing the technology, knowledge, skills and organisational ability critical to the development and growth of the markets it serves. The condensed consolidated financial statements of EOH, as at 31 July 2019 and for the year ended 31 July 2019, comprise the Company and its subsidiaries (together referred to as ‘the Group’) and the Group’s investments in associates and joint ventures.
2. STATEMENT OF COMPLIANCE
The condensed consolidated financial statements have been prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (‘IFRS’) and its interpretations adopted by the International Accounting Standards Board (‘IASB’) and comply with the Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, and contain at a minimum the information required by IAS 34: Interim Financial Reporting, the requirements of the Companies Act No 71 of 2008 of South Africa and the JSE Limited Listings Requirements.
3. BASIS OF PREPARATION
The condensed consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments that are measured at fair value through profit or loss at the end of each reporting period.
The condensed consolidated financial statements are presented in South African Rand, which is the Group’s presentation currency, rounded to the nearest thousand except for when otherwise indicated. The going concern basis has been used in preparing the condensed consolidated financial statements as the directors have a reasonable expectation that the Group will continue as a going concern for the foreseeable future.
The accounting policies and methods of computation applied in the condensed consolidated financial statements are consistent with those applied in the previous years, except as set out below.
The comparative financial information in the condensed consolidated financial statements has been restated based on information available at 31 July 2018. Refer to note 4 and note 6 for further information.
4. NEW AND AMENDED STANDARDS ADOPTED BY THE GROUP
The Group has applied the following standards and amendments for the first time to their annual reporting period commencing 1 August 2018:
4.1 IFRS 9 – Financial Instruments
IFRS 9 – Financial Instruments replaces IAS 39 – Financial Instruments: Recognition and Measurement for Annual Periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting.
The Group applied IFRS 9 retrospectively without restating comparatives, with an initial application date of 1 August 2018. Differences arising from the adoption of IFRS 9 have been recognised directly in retained earnings and non-controlling interests.
The effect of adopting IFRS 9 as at 1 August 2018 was, as follows:
| Figures in Rand thousand | Classification | Restated* balance under IAS 39 |
1 August 2018 remeasurement |
Balance under IFRS 9 |
|
| Impairment allowance: | |||||
| Other financial assets | Amortised cost | 167 106 | 35 521 | 202 627 | |
| Trade and other receivables | Amortised cost | 447 154 | 126 826 | 573 980 | |
| Contract assets | Contract assets | – | 37 534 | 37 534 | |
| Finance lease receivables | Finance lease receivables | – | 9 909 | 9 909 |
* Refer to note 6 – Restatement of financial statements for the impact on the affected assets.
The adoption of IFRS 9 fundamentally changed the Group’s accounting for impairment losses for financial assets by replacing IAS 39’s incurred loss approach with a forward looking expected credit loss approach. IFRS 9 requires the Group to recognise an allowance for expected credit losses for all financial assets not held at fair value through profit or loss and contract assets and finance lease receivables.
The additional impairments recognised with regard to other financial assets; trade and other receivables, contract assets and finance lease receivables resulted in a decrease in retained earnings of R206 million and a decrease in non-controlling interests of R4 million as at 1 August 2018.
4.2 IFRS 15: Revenue from Contracts with Customers
The adoption of IFRS 15 – Revenue from Contracts with Customers did not have a material impact on the Group’s condensed consolidated financial statements. The Group adopted IFRS 15 using the modified retrospective method of adoption with the date of initial application of 1 August 2018.
5. REPORTABLE IRREGULARITIES BY THE AUDITORS
The following reportable irregularities (‘RIs’) in terms of section 45 of the Auditing Profession Act were raised by the independent auditors during the current financial year:
Potentially suspicious transactions amounting to approximately R1,2 billion were entered into by EOH with suppliers, where the transactions may have related to illegitimate transactions, theft or bribery and corruption payments. These transactions appear to be primarily limited to the public sector business and to a limited number of EOH employees. Current EOH management have engaged with external parties to investigate the suspicious transactions.
The above would indicate that past directors and management failed to act in the best interests of the Company and in the public interest.
EOH provided funding in the form of an enterprise development loan to an entity which became an associated party. Previous directors of EOH as well as a director of the associated party failed to disclose the interests in the said contract at the time of becoming an associated party. It was alleged that the proceeds of the loan were passed through the associated party to another entity and thus not utilised for the original purpose of the loan. Management further alleged that the money was utilised for a political event and was initially not intended to be repaid.
EOH allegedly supplied IT equipment to an entity it was not specifically intended for with the intention of garnering favour with respect to future contracts. The invoice indicated that the equipment was sold to a related entity, though it was intended elsewhere.
Monies were paid to an entity where the allegations are that this was used as a vehicle to donate funds to a political party.
A donation was made, assisting in the payment of various expenditures, to an entity responsible for the awarding of tenders, in the same month as the awarding of the tender.
6. RESTATEMENT OF FINANCIAL STATEMENTS
During the current year, management identified a number of transactions that appeared to have been processed incorrectly in both current and prior periods; the impact of these transactions spanned various accounting topics, including revenue recognition, asset capitalisation and subsequent recovery, and timing of recognition of liabilities and other provisions for impairment.
In assessing whether the identified adjustments should be processed as prior period errors or recognised in the current period, management considered whether the facts that gave rise to the adjustments existed in prior years, or whether those events only arose due to information that came to light in the current year. The 2018 condensed consolidated financial statements and the condensed consolidated statement of financial position as at 1 August 2017 have been restated to correct the prior period errors. As a result of the extent and complexity of the restatements required to correct these errors, management have grouped the restatements according to the nature of these errors.
A brief explanation of each group of errors is provided below, following which an analysis is included of the financial impact on the affected financial statement line items:
Revenue
Under IAS 18 Revenue, revenue could only be recognised once it was probable that the economic benefits associated with the transaction would flow to the seller and the amount of revenue could be measured reliably, among other requirements. A number of revenue transactions had been recognised in prior years, for which it was not probable that benefits would flow to the Group due to a lack of valid and enforceable rights to the benefits, as valid contracts or other binding agreements were not in place at the time. These transactions primarily related to arrangements in the public sector. The requirements to recognise revenue for these transactions under IAS 18 were not met in prior years, based on the facts and circumstances that existed in prior years. The Group has therefore corrected for these errors in the prior year through the reversal of revenue, trade receivables and work-in-progress (unbilled revenue) balances.
In addition, a number of revenue transactions, for which the Group would have been considered to be an agent using information available in prior years had been incorrectly recognised on a gross basis in prior years due to the lack of an assessment of the Group’s agent/principal status in prior periods. This incorrect application of the accounting principles in the prior year has also been adjusted as a prior period error through the reversal of revenue and cost of sales and only recognising the margin as revenue.
Internally generated intangible assets
IAS 38 Intangible Assets distinguishes between research and development costs with regards to internally generated intangible assets. Costs related to research activities are expensed and costs related to development activities are capitalised if they meet certain specified criteria. Further, if an entity cannot distinguish the research phase from the development phase of an internal project, the entity treats the expenditure on that project as if it were incurred in the research phase only. The Group had capitalised certain costs incurred on internally generated intangible assets, for which the criteria for capitalisation as development costs had not been demonstrated in prior years. For the majority of these intangible assets, business plans had not been prepared and the ability of the assets to generate future economic benefits had not been demonstrated; the specified criteria set out in IAS 38 were therefore not met at the time of initial recognition of the intangible assets based on factors that existed at that time. The costs incurred should therefore never have been capitalised but, instead, recognised as research costs as incurred. Correction of this error has resulted in the reversal of capitalised intangible assets together with the reversal of any related amortisation of the capitalised intangible assets and an increase in research costs expensed.
Inventory licences
IAS 2 Inventories requires that for items to be capitalised as inventory, it should first meet the definition of an asset. The conceptual framework defines an asset as a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
Costs were incurred and capitalised as inventory in prior years even though it was doubtful, at the time of incurring the costs, that future economic benefits would flow to the Group. This relates largely to acquired licences that were assigned to specified potential customers which, once assigned, could only be sold to that potential customer, but for which the Group had no commitment from the potential customer that it would acquire the licence. Management believe that the costs incurred to acquire these licences should therefore have been recognised as an expense when incurred, taking into account the information that existed at the time of initial recognition. Accordingly, correction of this error has resulted in the reversal of inventory and an increase in expenses.
Provision for impairment on financial assets
Under IAS 39 Financial Instruments: Recognition and Measurement principles, a financial asset carried at amortised cost is impaired, and impairment losses recognised if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset. An entity is therefore required to assess at each reporting date whether there is any objective evidence of impairment. If such evidence exists, the entity is required to perform a detailed impairment calculation to determine whether an impairment loss should be recognised. Management identified certain financial assets carried at amortised cost, for which impairment indicators existed in prior years, including defaults on scheduled payments. The Group did not perform an adequate impairment assessment for these financial assets in prior years, despite the existence of these impairment indicators. Had an assessment been performed using information available at the time, additional impairment provisions would have been recognised. Correction of these errors has resulted in an increase in the provision for impairment, as well as an increase in the impairment expense for the prior period.
In the prior year, GCT had defaulted on loan repayments due to the Group, resulting in the existence of an indicator of impairment under IAS 39 at 31 July 2018. The Group did not identify the impairment indicator for GCT as a counterparty at that time, and therefore did not perform an adequate impairment test. An assessment of impairment, taking into account the facts that existed at 31 July 2018, resulted in the need to recognise an impairment provision on the GCT loan as a prior period error, with subsequent deterioration in 2019 being recognised in the current year.
Unrecorded liabilities/recoverability of assets
The Group has identified certain tax liabilities pertaining to prior periods that should have been recognised in prior years, but for which there was no accounting at the time. Such tax liabilities include liabilities which were assessed as a result of the ENS investigations. These tax liabilities arose from obligations that existed in prior years and not from reassessments of the Group’s tax liability position, and should have been recognised in prior periods based on information that existed at that time.
Additionally, management has identified cases in which revenue had been recognised for work performed in prior periods, without proper accrual of related costs incurred.
Recognition of these liabilities and accruals has been accounted for as a prior period error, resulting in increases in tax liabilities and trade and other payables, as well as increases in the expenses in the periods to which it relates.
A number of impairment indicators for the Group’s investment in TTCS, trade receivables and loan balances existed in prior years – these included:
- Default by TTCS, prior to 31 July 2018, on the repayment of debtor and loan balances due to the Group;
- Significant deterioration in key ratios of TTCS in the prior periods; and
- Ongoing and persistent foreign currency shortages in Zimbabwe.
Although impairment indicators existed in prior periods, the Group did not previously perform adequate impairment tests related to TTCS, which would have resulted in impairment provisions being recognised. The loan and debtor balance from TTCS, along with the Group’s investment in TTCS have been adjusted as prior period errors, with subsequent deterioration in 2019 being recognised in the current year.
The identified errors have been corrected by retrospective restatement in the period to which it relates. In most cases, it is impracticable to distinguish the period-specific effect of the error, due to changes in management and the lack of availability of information, in which case the error was corrected in the comparative 2018 condensed consolidated financial statements. The portion of the tax liabilities related to the ENS investigations pertaining to financial periods ended before 1 August 2017 have been adjusted for against the opening balances of liabilities and equity as at 1 August 2017.
The errors have been corrected by restating each of the affected financial statement line items for the prior periods as follows:
Statement of financial position (extract) as at 1 August 2017
| Correction of prior period errors | |||||||||||
| Figures in Rand thousand | Audited at 31 July 2017 |
Revenue | Internally generated intangible assets |
Inventory | Provision for impairment of financial assets |
Unrecorded liabilities/ recoverability of assets |
Restated audited at 1 August 2017 |
||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Intangible assets | 1 449 296 | 1 449 296 | |||||||||
| Equity-accounted investments | 847 917 | 847 917 | |||||||||
| Other financial assets | 355 268 | 355 268 | |||||||||
| Inventory | 599 764 | 599 764 | |||||||||
| Trade and other receivables | 5 132 697 | 5 132 697 | |||||||||
| Current taxation payable | (148 182) | (16 791) | (164 973) | ||||||||
| Trade and other payables | (2 466 647) | (83 952) | (2 550 599) | ||||||||
| Net assets | 8 561 604 | – | – | – | – | (100 743) | 8 460 861 | ||||
| Retained earnings | (3 491 764) | – | – | – | – | 100 743 | 3 391 021 | ||||
| Total equity | (8 561 604) | – | – | – | – | 100 743 | (8 460 861) | ||||
Statement of financial position (extract) as at 31 July 2018
| Correction of prior period errors | ||||||||||||
| Figures in Rand thousand | Audited at 31 July 2018 |
Revenue | Internally generated intangible assets |
Inventory | Provision for impairment of financial assets |
Unrecorded liabilities/ recoverability of assets |
Adoption of IFRS 9 (refer note 4) |
Restated audited at 31 July 2018 |
||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Intangible assets | 1 265 220 | (384 828) | 880 392 | |||||||||
| Equity-accounted investments | 822 204 | (291 343) | 530 861 | |||||||||
| Other financial assets | 907 359 | (167 106) | (35 521) | 704 732 | ||||||||
| Inventory | 431 609 | (54 108) | 377 501 | |||||||||
| Trade and other receivables | 5 583 044 | (219 660) | (208 379) | (257 340) | (164 360) | 4 733 305 | ||||||
| Finance lease receivables | 203 818 | (9 909) | 193 909 | |||||||||
| Current taxation payable | (149 830) | (20 400) | (170 230) | |||||||||
| Trade and other payables | (2 760 283) | (378 937) | (3 139 220) | |||||||||
| Net assets | 8 128 713 | (219 660) | (384 828) | (54 108) | (375 485) | (948 020) | (209 790) | 5 936 822 | ||||
| Retained earnings | (3 184 359) | 219 660 | 384 828 | 54 108 | 375 485 | 948 020 | 209 790 | (992 468) | ||||
| Total equity | (8 128 713) | 219 660 | 384 828 | 54 108 | 375 485 | 948 020 | 209 790 | (5 936 822) | ||||
Statement of profit or loss and other comprehensive income (extract) for the year ended 31 July 2018
| Correction of prior period errors | ||||||||||||
| Figures in Rand thousand | Audited 31 July 2018 |
Revenue | Internally generated intangible assets |
Inventory | Provision for impairment on financial assets |
Unrecorded liabilities |
Reclassified as discontinued operations (note 14) |
Restated audited 31 July 2018 |
||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Continuing operations | ||||||||||||
| Revenue | 16 341 024 | (469 678) | (3 768 029) | 12 103 317 | ||||||||
| Cost of sales | (11 523 643) | 250 018 | (18 964) | (84 751) | 2 695 181 | (8 682 159) | ||||||
| Gross profit | 4 817 381 | (219 660) | (18 964) | – | – | (84 751) | (1 072 848) | 3 421 158 | ||||
| Net financial asset impairment losses | (197 998) | (375 485) | 39 078 | (534 405) | ||||||||
| Operating expenses | (3 811 494) | (365 863) | (54 108) | (758 917) | 763 168 | (4 227 214) | ||||||
| Operating loss before interest and equity-accounted profit | 807 889 | (219 660) | (384 827) | (54 108) | (375 485) | (843 668) | (270 602) | (1 340 461) | ||||
| Investment income | 52 750 | (14 549) | 38 201 | |||||||||
| Share of equity-accounted profit | 48 223 | (48 686) | (463) | |||||||||
| Finance costs | (352 145) | 4 961 | (347 184) | |||||||||
| Profit/(loss) before taxation | 556 717 | (219 660) | (384 827) | (54 108) | (375 485) | (843 668) | (328 876) | (1 649 907) | ||||
| Taxation | (268 460) | (3 609) | 66 154 | (205 915) | ||||||||
| Profit/(loss) for the year from continuing operations | 288 257 | (219 660) | (384 827) | (54 108) | (375 485) | (847 277) | (262 722) | (1 855 822) | ||||
| Loss for the year from discontinued operations | (392 450) | 262 722 | (129 729) | |||||||||
| Loss for the year | (104 193) | (219 660) | (384 827) | (54 108) | (375 485) | (847 277) | – | (1 985 551) | ||||
| Other comprehensive income | (48 317) | (48 317) | ||||||||||
| Total comprehensive income for the year | (152 510) | (219 660) | (384 827) | (54 108) | (375 485) | (847 277) | – | (2 033 868) | ||||
| Loss attributable to: | ||||||||||||
| Owners of EOH Holdings Limited | (100 984) | (1 976 195) | ||||||||||
| Non-controlling interest | (3 209) | (9 356) | ||||||||||
| Total | (104 193) | (1 985 551) | ||||||||||
| Total comprehensive income attributable to: | ||||||||||||
| Owners of EOH Holdings Limited | (146 267) | (2 021 478) | ||||||||||
| Non-controlling interest | (6 243) | (12 390) | ||||||||||
| Total | (152 510) | (2 033 868) | ||||||||||
| From continuing and discontinued operations (cents) | Audited 31 July 2018 |
Restated audited 31 July 2018 |
||||||||||
| Loss per share | (70) | (1 367) | ||||||||||
| Diluted loss per share | (68) | (1 367) | ||||||||||
| Headline earnings/(loss) per share | 283 | (546) | ||||||||||
| Diluted earnings/(loss) per share | 276 | (546) | ||||||||||
| From continuing operations (cents) | ||||||||||||
| Earnings/(loss) per share | 202 | (1 277) | ||||||||||
| Diluted earnings/(loss) per share | 196 | (1 277) | ||||||||||
| Headline earnings/(loss) per share | 278 | (728) | ||||||||||
| Diluted earnings/(loss) per share | 271 | (728) | ||||||||||
The restatement adjustments are all non-cash adjustments and therefore do not impact cash generated before working capital changes or any other line items on the consolidated statement of cash flows.
7. PROPERTY, PLANT AND EQUIPMENT
| Figures in Rand thousand | Reviewed at 31 July 2019 |
Audited at 31 July 2018 |
||
|---|---|---|---|---|
| Opening balance | 742 983 | 677 719 | ||
| Additions | 226 268 | 289 470 | ||
| Acquired in business combinations | 8 180 | 13 517 | ||
| Foreign currency translation | (1 047) | (1 699) | ||
| Disposals | (46 131) | (72 881) | ||
| Disposal of businesses | (26 506) | – | ||
| Depreciation | (204 848) | (163 143) | ||
| Current assets held for sale | (217 225) | – | ||
| Closing balance | 481 674 | 742 983 |
8. GOODWILL
| Figures in Rand thousand | Reviewed at 31 July 2019 |
Restated audited at 31 July 2018 |
||
|---|---|---|---|---|
| Opening balance | 4 255 281 | 4 625 403 | ||
| Acquired in business combinations | 70 877 | 340 255 | ||
| Foreign currency translation | 27 874 | 9 268 | ||
| Disposals | (325 605) | (634 935) | ||
| Impairments: discontinued | (506 762) | – | ||
| Impairments: continuing | (1 348 579) | (84 710) | ||
| Current assets held for sale | (322 232) | – | ||
| Closing balance | 1 850 854 | 4 255 281 |
A number of economic, operational and negative events during the year ended 31 July 2019 had a significant negative impact on EOH’s market capitalisation and certain underlying businesses. The Group has also gone through a review of its strategy which impacted CGU allocations. This, combined with the sale and discontinuation of certain non-core business activities, has resulted in a material impact on the carrying value of goodwill. The Group performed a review of goodwill for impairment, which highlighted impairments of R1 855 million (R613 million in the iOCO segment and R1 242 million in the NEXTEC segment).
iOCO
The impairments to goodwill in iOCO relate mainly to EOH’s public sector-focused ERP businesses. Goodwill amounting to R198 million across a number of CGUs was impaired due to continued project complexities, slow debtor recoveries and the impact of no further large ERP projects on the continuing outsourcing business.
A further R116 million in impairments in this division were driven by lost or delayed contracts and projects as a result of the reputational damage sustained by EOH.
Goodwill relating to iOCO International CGUs was impaired by R114 million driven mainly by weaker cash conversion and project delivery difficulties in the Middle East and European entities.
The balance of the iOCO impairments relates to a number of CGUs which have been negatively impacted by challenging market conditions.
NEXTEC
The industrial technologies division of NEXTEC sustained a number of impairments as detailed below:
- The rail transport technologies’ CGU was impaired by R146 million, due to continuing difficulties in completing active contracts and ongoing delays in starting new contracts which have driven continued underperformance against budgets.
- Despite project awards and sign-off for various REIPP projects in the energy sector (electricity generation), there have been continued delays in project launch and completion of transmission and distribution projects both in South Africa and Mozambique, resulting in an impairment of R196 million in Energy-related CGUs.
- CGUs providing water infrastructure solutions continue to be impacted by project kick-off delays on projects in hand, as well as new project awards as a result of public sector funding and administrative issues, which have resulted in continued underperformance to budgets and impairments of R131 million.
- Margins within the digital infrastructure businesses have also been negatively impacted by original equipment manufacturers opting to sell directly to customers, resulting in a drop in revenue and margin as well as an impairment of R90 million to goodwill.
- Impairments of R55 million relate to certain non-core CGUs that are held for sale.
The business process outsourcing division of NEXTEC sustained a number of impairments as detailed below:
- A number of CGUs which provide employee services, were impacted by the 2018 High Court ruling related to temporary staffing. This resulted in decreased revenue and reduced margins, driving impairments of R117 million.
- Changes in US legislation governing clinical trials resulted in a loss of customers in the outsourced clinical trials business. This has impacted the earnings forecast and profitability levels resulting in an impairment of R95 million.
- Impairments of R67 million relate to certain non-core CGUs that are held for sale.
- Inability to maintain and secure customer contracts contributed to R63 million of the impairment recognised.
The balance of the NEXTEC impairments relate to a number of CGUs impacted by the negative events and challenging South African market conditions, resulting in further impairments.
9. INTANGIBLE ASSETS
| Figures in Rand thousand | Reviewed at 31 July 2019 |
Restated audited* at 31 July 2018 |
||
|---|---|---|---|---|
| Opening balance | 880 392 | 1 449 296 | ||
| Additions | 186 424 | 336 592 | ||
| Acquired in business combinations | – | 141 801 | ||
| Foreign currency translation | (4 970) | (425) | ||
| Impairments | (135 594) | (393 494) | ||
| Disposals | (20 549) | (390 660) | ||
| Disposals through business combinations | (136 073) | – | ||
| Amortisation | (230 968) | (262 718) | ||
| Current assets held for sale | (49 688) | – | ||
| Closing balance | 488 974 | 880 392 |
* Refer to note 6 for further information regarding the restatement of the prior year.
Impairments to intangible assets largely relate to:
- Customer relationships and customer contracts were impaired for R107 million after the profitability of the related relationships and contracts deteriorated below expected levels.
- The remaining impairments relate to other internally generated software in a number of underperforming CGUs in which goodwill impairments have also been recognised of R28 million.
10. EQUITY-ACCOUNTED INVESTMENTS
| Figures in Rand thousand | Reviewed at 31 July 2019 |
Restated audited* at 31 July 2018 |
||
|---|---|---|---|---|
| Opening balance | 530 861 | 847 917 | ||
| Additions | 190 454 | – | ||
| Dividends received | – | (3 638) | ||
| Foreign currency translation | (83 307) | (60 298) | ||
| Foreign currency translation recognised in profit or loss | 94 550 | – | ||
| Disposals** | (146 460) | – | ||
| Capital contribution | 3 243 | – | ||
| Impairment: Continuing operations | (146 500) | – | ||
| Impairment: Discontinued operations | (121 405) | (301 343) | ||
| Share of equity-accounted losses (continuing) | (9 814) | (463) | ||
| Share of equity-accounted (losses)/profits (discontinued) | (11 087) | 48 686 | ||
| Current assets held for sale | (72 468) | – | ||
| Closing balance | 228 067 | 530 861 |
| * | Refer to note 6 for further information regarding the restatement of the prior year. |
| ** | Refer to note 16 for further information regarding the change of control in the TTCS Group. |
EOH Mthombo sold 70% of its wholly owned subsidiary Construction Computer Software (CCS) for an amount of R444 million to RBI Limited, a subsidiary of German-listed RIB Software SE (RIB) as at 31 July 2019. EOH retains a 30% shareholding in CCS, and will be able to participate in CCS expansion and growth. The change in shareholding is reflected as an addition to equity investments, the entity was formerly recognised as a subsidiary.
Equity accounted investments have been impaired by R268 million
- As part of the Group’s strategy to exit from non-core operations, a number of equity-accounted investments have been classified as held for sale.
- R75 million of the impairments relate to EOH’s investments in Turkey as a result of increased levels of political and macro-economic risk causing delays in project kick-offs and a deterioration in cash recovery rates.
- Margin erosion, deterioration in pipeline and reduced cash conversion rates triggered an impairment of R151 million in EOH’s South American-based ERP utilities investment.
The equity-accounted investments are as follows:
| Figures in Rand thousand | Reviewed at 31 July 2019 |
Restated audited* at 31 July 2018 |
||
|---|---|---|---|---|
| Continuing equity accounted investments | ||||
| Computer Construction Software | 190 453 | – | ||
| Asay Group | 24 538 | 80 037 | ||
| Cozumevi | 13 071 | 35 934 | ||
| TTCS Group | – | 161 266 | ||
| Virtuoso Consulting | – | 112 636 | ||
| Bessertec Group | – | 80 886 | ||
| Acron | – | 40 199 | ||
| Other | 5 | 19 903 | ||
| 228 067 | 530 861 | |||
| Equity accounted investments held for sale | ||||
| Virtuoso Consulting | 64 175 | – | ||
| Bessertec Group | 896 | – | ||
| Other** | 7 397 | – | ||
| 72 468 | – |
| * | Refer to note 6 for further information regarding restatement of the prior year. |
| ** | Other includes the TTCS Group, Acron and other investments held for sale. |
11. ASSETS HELD FOR SALE
The Group recently refined its operational structure into three distinct reportable segments to allow for leaner and more agile core businesses with separate capital and governance structures. Opportunities are being explored for the sale of certain non-core assets and, as a result, there are a number of businesses that were approved for sale and for which the sale is expected to be completed within 12 months from the reporting date. These businesses are classified as disposal groups held for sale and the assets and liabilities of these disposal groups have been presented as held for sale at 31 July 2019. In addition, Construction Computer Software (CCS) as well as other smaller businesses were disposed of during the period.
The major classes of assets and liabilities of the disposal groups, per reportable segment, classified as held for sale as at 31 July 2019 are as follows:
| Figures in Rand thousand | iOCO | NEXTEC | IP | Reviewed for the year ended 31 July 2019 |
||
|---|---|---|---|---|---|---|
| Assets | ||||||
| Property, plant and equipment | 85 122 | 128 076 | 4 027 | 217 225 | ||
| Goodwill and intangible assets | 795 | 358 272 | 12 853 | 371 920 | ||
| Equity-accounted investments | 72 468 | – | – | 72 468 | ||
| Other financial assets | – | 7 710 | (421) | 7 289 | ||
| Deferred taxation | 261 | 24 734 | 2 220 | 27 215 | ||
| Inventory | 4 980 | 30 166 | – | 35 146 | ||
| Current taxation receivable | 575 | 2 584 | – | 3 159 | ||
| Trade and other receivables | 99 625 | 526 698 | 88 239 | 714 562 | ||
| Cash and cash equivalents | 47 919 | 221 110 | 41 344 | 310 373 | ||
| Assets held for sale | 311 745 | 1 299 350 | 148 262 | 1 759 357 | ||
| Liabilities | ||||||
| Other financial liabilities | (978) | (4 433) | (3 837) | (9 248) | ||
| Finance lease payables | – | – | (240) | (240) | ||
| Deferred taxation | (233) | (467) | (1 873) | (2 573) | ||
| Current taxation payable | 330 | (11 566) | (2 614) | (13 850) | ||
| Trade and other payables | (105 586) | (331 133) | (32 222) | (468 941) | ||
| Deferred income | – | (67 980) | (2 048) | (70 028) | ||
| Liabilities directly associated with the assets held for sale | (106 467) | (415 579) | (42 834) | (564 880) | ||
| Net assets directly associated with the disposal groups | 205 278 | 883 771 | 105 428 | 1 194 477 | ||
| Cumulative amounts recognised in other comprehensive income | ||||||
| Foreign currency translation reserve | 4 709 | 2 021 | (926) | 5 804 | ||
| Impairment loss for write‑down to fair value less costs to sell | ||||||
| Continuing operations – operating expenses | – | (22 172) | – | (22 172) | ||
| Discontinued operations (note 14) | (135 374) | (450 994) | (41 799) | (628 167) | ||
| (135 374) | (473 166) | (41 799) | (650 339) |
The discontinued operation (GCT Group) was disposed of during the year ended 31 July 2018. As a result, no assets were held for sale at 31 July 2018.
12. STATED CAPITAL
| Figures in Rand thousand | Reviewed for the year ended 31 July 2019 |
Audited for the year ended 31 July 2018 |
||
|---|---|---|---|---|
| Opening balance | 3 443 223 | 3 333 678 | ||
| Shares issued for cash* | 713 115 | – | ||
| Shares issued as a result of the acquisition of businesses | 48 427 | 210 503 | ||
| Shares issued to the Group share incentive and retention schemes | 1 170 | 10 248 | ||
| Treasury shares | 33 686 | (111 206) | ||
| Total | 4 239 621 | 3 443 223 |
| * | The Lebashe transaction was approved by shareholders on 18 September 2018 and effectively implemented on 1 October 2018. Since the date of approval Lebashe has: |
- invested R750 million in three tranches in EOH ordinary shares based on a 30-day VWAP at a 10% discount for an average share price of R33.59; and
- received 40 million unlisted EOH A shares which will be redeemed in five years on 1 October 2023 through an ordinary share issue. The A shares rank equal to an EOH ordinary share in respect of voting rights and each EOH A share will receive cash dividends in an amount equal to the value of 15% of dividends paid by EOH to ordinary shareholders. The remaining 85% of the dividend value will be accrued and redeemed through the redemption of the A shares. The obligation to Lebashe is treated as an equity transaction as the settlement will be undertaken in ordinary shares and the transaction is therefore within the scope of IFRS 2
The related IFRS 2 share-based payment charge of R157 million has been recognised in the statement of profit or loss.
13. DISAGGREGATED REVENUE
| Figures in Rand thousand | Reviewed for the year ended 31 July 2019 |
|
|---|---|---|
| Revenue by sector | ||
| Public sector | 18% | |
| Private sector | 82% | |
| Total | 100% | |
| Major revenue types | ||
| Software/licence contracts | 357 544 | |
| Hardware sales | 2 060 857 | |
| Managed services | 3 145 623 | |
| Services | 8 391 367 | |
| Hardware maintenance | 91 355 | |
| Software maintenance | 927 938 | |
| Sale of goods – other | 53 449 | |
| Rentals | 287 913 | |
| Other – services | 57 353 | |
| Total | 15 373 399 | |
| Timing of revenue recognition | ||
| Goods or services transferred to customers: | ||
| – at a point in time | 2 471 849 | |
| – over time | 12 901 550 | |
| Total | 15 373 399 | |
| Continuing operations | 11 791 070 | |
| Discontinued operations | 3 582 329 | |
| Total | 15 373 399 |
14. DISCONTINUED OPERATIONS
Identification and classification of discontinued operations
There were a number of businesses that were approved for sale at 31 July 2019, and for which the sale is expected to be completed within 12 months from the reporting date, as well as businesses that were already sold during the current and previous reporting periods that have met the requirements to be presented as discontinued operations and have accordingly been presented as such.
Judgement was applied in determining whether a component is a discontinued operation by assessing whether it represents a separate major line of business or geographical area of operations or is part of a single plan to dispose of a separate major line of business or geographical area of operations.
The Group’s intention to dispose of these non-core assets triggered an initial impairment assessment on the underlying assets at 31 July 2019, and the resulting impairment was allocated to the identified disposal groups (refer to note 8: Goodwill).
| Figures in Rand thousand | Reviewed for the year ended 31 July 2019 |
Restated audited~ for the year ended 31 July 2018 |
||
|---|---|---|---|---|
| Revenue | 3 582 329 | 3 768 030 | ||
| Expenses | (4 180 645) | (3 494 790) | ||
| Other income | 76 247 | 55 636 | ||
| Profit before tax | (522 069) | 328 876 | ||
| Tax expense | (40 822) | (66 155) | ||
| Remeasurement to fair value less costs to sell | (628 167) | – | ||
| Gain/(loss) on disposal | 329 603 | (392 450) | ||
| Total loss from discontinued operations | (861 455) | (129 729) | ||
| Attributable to: | ||||
| Equity-holders of the parent | (863 515) | (129 729) | ||
| Non-controlling interest | 2 060 | – | ||
| Earnings per share (cents) | ||||
| Loss per share from discontinued operations | (531) | (90) | ||
| Diluted loss per share from discontinued operations | (531) | (90) |
~ Comparative figures previously reported have been amended to reflect continuing operations prevailing for the year ended 31 July 2019.
Reviewed for the year ended to 31 July 2019
| Figures in Rand thousand | iOCO* | NEXTEC | IP | Total | |
|---|---|---|---|---|---|
| Revenue | 659 027 | 2 472 118 | 45 184 | 3 582 329 | |
| Expenses | (941 112) | (2 726 198) | (513 335) | (4 180 645) | |
| Other income | 369 | 69 747 | 6 131 | 76 247 | |
| Profit before tax | (281 716) | (184 333) | (56 020) | (522 069) | |
| Tax expense | (2 605) | (45 993) | 7 776 | (40 822) | |
| Remeasurement to fair value less costs to sell | (135 373) | (450 995) | (41 799) | (628 167) | |
| Gain/(loss) on disposal | 109 389 | – | 220 214 | 329 603 | |
| Total profit or loss from discontinued operations | (310 305) | (681 321) | 130 171 | (861 455) |
* iOCO discontinued operations include the TTCS Group and other international businesses.
On 31 July 2019, CCS was sold for proceeds of R444 million, resulting in a gain on disposal of R220 million.
15. CHANGE OF CONTROL IN INVESTMENT IN TTCS
The Group acquired 49% of the TTCS Group (‘TTCS’) in 2015 and had since been equity-accounting the investment.
TTCS provides system integration, product delivery, maintenance and support services predominantly to customers in Zimbabwe and growing operations in Zambia, Malawi, Kenya, Uganda, Rwanda, Tanzania, Ghana, Botswana and Nigeria, as well as other project delivery in sub-Saharan Africa.
As at 31 July 2018, the Group had the following balances in relation to TTCS:
Equity-accounted investment – R453 million
Other financial assets (loan) – R87 million
Trade and other receivables – R424 million
During the first half of 2019, an error in consideration of the impact of the impairment indicators on the measurement of TTCS Zimbabwe was re-evaluated. The recoverability of trade receivables and loan balances and the expected cash flows were re-evaluated in terms of IAS 39 and the carrying value of the investment in the TTCS Group was re-evaluated, resulting in prior year impairment provisions of R542 million, which was adjusted for as a prior period error, adjusting the opening balances for 2019. Refer to note 6 for further details on the correction of the prior period error.
Obtaining control
The Group gained control of the TTCS Group of Companies on 17 January 2019 as a result of investigations and a settlement between SAP, the Department of Justice in the United States of America and TTCS, with the Board of directors of TTCS being reconstituted to afford EOH 60% of the voting rights. Judgement was applied in assessing whether there was control and the Group was considered to have power over TTCS, exposure or rights to variable returns from its involvement with TTCS and the ability to use its power over TTCS to effect the Group’s returns from this date onwards. The direct and effective shareholding in each entity remained unchanged.
Obtaining control required the Group to recognise TTCS as a subsidiary and therefore ‘dispose’ of its associate at fair value as part of the acquisition of the subsidiary.
As a result of the deemed disposal of the investment in TTCS as an associate, a loss on disposal of R146 million was recognised. This loss was as a result of the Group’s reliance on the Zimbabwean operations and the recent and continuing disruptions within Zimbabwe, as well as the impact of changes in local currency.
The (loss)/profit for the period from the investment in associate and deemed disposal subsequently is:
| Figures in Rand thousand | Five months ended 31 December 2018 |
Year ended 31 July 2018 |
||
| Share of (loss)/profit from equity-accounted associate investment | (14 297) | 20 589 | ||
| Non-cash, once-off, accounting loss on deemed disposal of associate* | (146 460) | – | ||
| (160 757) | 20 589 |
* The value of TTCS Group is based on a valuation of the current shareholding and the following key assumptions:
- a four-year forecast for the TTCS Group’s operations;
- a weighted average cost of capital of between 17,0% and 23,6% (depending on the country of operation);
- a terminal growth rate of 2,1%; and
- discounts of 10% to 30% for a lack of marketability and the current illiquid nature of the investments which increased significantly as a result of the recent deterioration in local currency, as recognised through the Old Mutual Implied Rate.
The businesses were valued at approximately R64 million at 31 December 2018. Conservatively, as a result of the continuing uncertainty regarding Zimbabwe and the new currency, management’s expectation was that dividends were not likely to be paid in the medium to long term. Therefore, when calculating goodwill and the loss on disposal, an enterprise value of Rnil has been used.
The subsequent deemed acquisition of TTCS as a subsidiary impacted the Group as follows:
| Figures in Rand thousand | 31 December 2018** |
||
| Fair value of assets and liabilities acquired | |||
| Non-current assets | 37 058 | ||
| Current assets | 48 590 | ||
| Current liabilities (including minority portion of EOH payables)*** | (387 346) | ||
| Net liabilities acquired | (301 698) | ||
| Non-controlling interests measured at their share of the fair value of the net | |||
| assets/value of TTCS (including minority portion of EOH payables)*** | 300 448 | ||
| Amount capitalised | (1 250) | ||
| Goodwill | 70 877 | ||
| Goodwill impairment | (70 877) | ||
| Net cash outflow* | (1 250) |
| * | Given the nature of the acquisition, there is no additional consideration payable. |
| ** | The fair value of the assets and liabilities acquired has been translated to ZAR based on an Old Mutual Implied Rate of 2.79 at 31 December 2018 for TTCS Zimbabwe, resulting in a negative net asset value as the majority of the loans and trade payables are denominated in foreign currencies, while current assets are predominantly USD RTGS-based. The loans of R86 million and trade payables of R480 million payable to EOH at 31 December 2018 are included in current liabilities and have been eliminated against trade receivables and loans on consolidation. |
| *** | Minority portion of EOH payables are eliminated on consolidation. |
| Figures in Rand thousand | 2019 | |
|---|---|---|
| Loss after tax contribution to trading results for the period | (9 557) | |
| Contribution had the effective date of obtaining control been 1 August 2018 | (16 155) |
There were no acquisition-related costs during the period included in operating expenses in the statement of profit or loss.
The contribution to the trading results of the TTCS Group have been accounted for from the effective date of the business combination. The accounting of these subsidiaries is based on best estimates and fair values.
Loss of control
A Sale of Shares Agreement (SSA) was entered into between the Group and the previous shareholder, whereby the Group will sell its entire 49% shareholding to the previous shareholder, with the risk and benefit of the 49% shareholding passing with effect from 1 May 2019. From 1 May 2019, the Group no longer has any board representation at TTCS and does not have the ability to appoint any board members. The Group effectively lost control over TTCS on 1 May 2019.
The SSA contained three suspensive conditions for the sale and purchase to be completed and as at 31 July 2019, one of the suspensive conditions, being the relevant exchange control approval from the Reserve Bank of Zimbabwe, was not received. As the sale was not yet concluded at the reporting date, the retained investment was classified as held for sale (refer to note 11).
The Group accounts for the investment retained in TTCS upon loss of control, as an investment in associate under IAS 28.
According to IFRS 10, when a parent loses control of a subsidiary, it must recognise any investment retained in the former subsidiary at its fair value at the date when control is lost. The fair value of the retained investment is Rnil.
The results of TTCS for the current period as well as the prior period are shown as discontinued operations (refer to note 14).
The Group realised an accounting profit on loss of control of R125 million. Loans owing by TTCS to the Group were waived and the Group has a SAP settlement liability of R46 million on behalf of the TTCS Group.
16. FINANCIAL INSTRUMENTS
The following table summarises the carrying amount of financial instruments included in other financial assets and other financial liabilities:
Other financial assets
| Figures in Rand thousand | Reviewed for the year ended 31 July 2019 |
Restated audited* for the year ended 31 July 2018 |
||
|---|---|---|---|---|
| Financial assets | ||||
| Financial assets at fair value through profit or loss | 28 322 | 138 788 | ||
| Debt instrument at amortised cost | 67 285 | 565 944 | ||
| Classification as assets held for sale | (7 289) | – | ||
| 88 328 | 704 732 |
* Refer to note 6 for further information regarding the restatement of the prior year.
Financial assets at fair value through profit or loss
Other financial assets (level 3) relate to non-controlling interests in unlisted businesses and a cell captive. The valuation of the unlisted business is based on a discounted cash flow model which has been adjusted for risk inherent in the investees’ nature of operations and the cell captive is valued based on the net asset value reported by the service provider. At 31 July 2019 the carrying value of the level 3 financial assets, based on the directors’ evaluation, is R28.3 million (31 July 2018: R49.8 million).
| Figures in Rand thousand | Reviewed for the year ended 31 July 2019 |
Restated audited* for the year ended 31 July 2018 |
||
|---|---|---|---|---|
| Financial assets at fair value through profit or loss | ||||
| – level 1 | – | 89 010 | ||
| – level 3 | 28 332 | 49 768 | ||
| 28 332 | 138 788 | |||
| Reconciliation of movement: | ||||
| Balance at the beginning of the period | 49 768 | 39 462 | ||
| Transfer from loans and receivables | (13 540) | 5 774 | ||
| Additions | 870 | – | ||
| Net changes in fair value | (8 766) | 4 532 | ||
| Balance at the end of the period | 28 332 | 49 768 |
| Figures in Rand thousand | Reviewed for the year ended 31 July 2019 |
Audited for the year ended 31 July 2018 |
||
|---|---|---|---|---|
| Other financial liabilities | ||||
| Interest-bearing liabilities | 2 980 602 | 3 404 595 | ||
| Non-interest-bearing liabilities | 352 604s | 699 401 | ||
| Liabilities directly associated with the assets held for sale | (9 249) | – | ||
| 3 323 957 | 4 103 996 |
Financial liabilities measured at fair value through profit or loss, in terms of the hierarchy, are classified as level 3 as the valuation techniques used are based on unobservable inputs for the liability.
| Figures in Rand thousand | Reviewed for the year ended 31 July 2019 |
Audited for the year ended 31 July 2018 |
||
|---|---|---|---|---|
| Fair value through profit or loss: | ||||
| Vendors for acquisition – level 3 | 303 313 | 633 709 | ||
| 303 313 | 633 709 |
Vendors for acquisition
The balance in respect of vendors for acquisition relates to the contingent consideration where business combinations are subject to profit warranties. The profit warranties allow for a defined adjusted value to the consideration payable in the event that the warranted profit after tax is not achieved, or in the event that it is exceeded, an agreed sharing in the surplus. The fair value of the contingent arrangement is initially estimated by applying the income approach assuming that the relevant profit warrant will be achieved. Subsequent measurement uses the income approach to calculate the present value of the expected settlement payment using the latest approved budgeted results and reasonable growth rates for the remainder of the relevant warranty periods taking into account any specific circumstances.
Profit warrant periods normally extend over a 24-month period.
Upwardly revised performance expectations would result in an increase in the related liability, limited to the terms of the applicable purchase agreement.
Unobservable inputs include budgeted results based on margins and revenue growth rates historically achieved by the various segments. Changing such inputs to reflect reasonably possible alternative assumptions does not significantly change the fair value of the vendors for acquisition liability.
The EOH Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that reports directly to the Group Chief Financial Officer who oversees all significant fair value measurements.
| Figures in Rand thousand | Reviewed for the year ended 31 July 2019 |
Audited for the year ended 31 July 2018 |
||
|---|---|---|---|---|
| Reconciliation of movement: | ||||
| Balance at the beginning of the period | 633 709 | 1 167 453 | ||
| Raised through business combinations | – | 153 695 | ||
| Acquisitions of remaining non-controlling interests | – | 67 839 | ||
| Discharged to vendors | (366 413) | (730 677) | ||
| Foreign exchange effects | 2 818 | (20 071) | ||
| Net changes in fair value | 33 199 | (4 530) | ||
| Balance at the end of the period | 303 313 | 633 709 |
The Group does not have any financial instruments that are subject to offsetting.
All short-term receivables and payables carrying amounts approximate their fair values due to their short-term nature.
There have been no transfers between levels of the fair value hierarchy.
Non-recurring fair value measurements
Disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. The fair values were determined based on sales agreements that are in place for each of the disposal groups that are held for sale. The total of such fair values is R856 million. The discounted cash flow method (DCF) is used to determine their values, when the sales amount from the sale agreements was discounted using the adjusted weighted average cost of capital specific to that cash-generating unit (CGU). These fair values are categorised as level 3, based on inputs used.
17. CONTINGENCIES AND COMMITMENTS
Commitments
The Group has issued guarantees and performance bonds from various Group companies as well as through available third-party facilities. At this stage, the Group is not aware of any guarantees or bonds issued which may be exercised by holders. The balance at 31 July 2019 was R358 million (2018: R305 million).
18. EVENTS AFTER REPORTING DATE
Continued disposal of non-core assets
The Group is considering disposing of certain businesses. To date, six agreements have been reached for the sale of a number of businesses that are classified as held for sale at 31 July 2019 for an estimated total consideration of R18 million.
There have also been two businesses that have been classified as held for sale subsequent to year end.
Various disposal processes are expected to be realised, but have not met the criteria to be recognised as assets held for sale by 31 July 2019.
Lebashe investment
On 11 October 2019, EOH shareholders were advised that Lebashe had formally notified EOH of its intention not to subscribe for the R250 million third tranche of the subscription undertaking. Lebashe took a conscious decision to allow EOH to establish a new independent Board of directors (New Board) without representation from Lebashe until after the conclusion of the ENSafrica investigation and the determination of the impact thereof.
Accordingly, EOH is, at any time after 1 October 2019, at its discretion, entitled to:
(i) require the forfeiture of dividends on 10 000 000 EOH A shares to EOH; and
(ii) redeem 10 000 000 EOH A shares for R1,00.
While the current economic dilution of the 10 000 000 EOH A shares is limited, the EOH A shares each have the same voting rights as an EOH ordinary share and are therefore an important consideration in the deliberations of the New Board. Further announcements will be made as soon as a decision has been made by the New Board.
Notwithstanding the decision taken by Lebashe not to subscribe for the third tranche in accordance with the transaction terms, the investment and strategic relationship with EOH remains important to Lebashe and Lebashe has committed to still providing the last tranche of funding originally committed to as part of the transaction subject to agreeing to mutually acceptable terms and EOH’s shareholder approval, if required. Discussions between Lebashe and the New Board are ongoing with a view to finding a solution that is in the best interests of all capital providers.
Debt reduction plan
We have renegotiated payment terms with our lenders, which will accelerate the deleveraging of our balance sheet in an orderly manner, from sales proceeds. This has resulted in R750 million being classified as short-term liabilities in the financial statements.